UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

x      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal year ended February 3, 2007.

OR

o      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

Commission file number 1-303

THE KROGER CO.
(Exact name of registrant as specified in its charter)

Ohio   31-0345740  
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)  
 
1014 Vine Street, Cincinnati, OH   45202  
(Address of principal executive offices)   (Zip Code)  

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class       Name of each exchange on which registered  
 
Common Stock $1 par value   New York Stock Exchange  
   

Securities registered pursuant to section 12(g) of the Act:

NONE
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes    x No    o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  
Yes    o No    x

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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes    x No    o

Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 of Regulation S-K (§299.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

Indicated by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer      x Accelerated filer      o Non-accelerated filer      o


Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). 
Yes    o No    x

The aggregate market value of the Common Stock of The Kroger Co. held by non-affiliates as of August 12, 2006: $16,271 million. There were 709,560,479 shares of Common Stock ($1 par value) outstanding as of March 30, 2007.

Documents Incorporated by Reference:

Proxy statement to be filed pursuant to Regulation 14A of the Exchange Act on or before June 4, 2007, incorporated by reference into Part III of Form 10-K.


PART I

ITEM 1.       BUSINESS.

      The Kroger Co. was founded in 1883 and incorporated in 1902. As of February 3, 2007, the Company was one of the largest retailers in the United States based on annual sales. The Company also manufactures and processes some of the food for sale in its supermarkets. The Company’s principal executive offices are located at 1014 Vine Street, Cincinnati, Ohio 45202, and its telephone number is (513) 762-4000. The Company maintains a web site (www.kroger.com) that includes additional information about the Company. The Company makes available through its web site, free of charge, its annual reports on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K, including amendments thereto. These forms are available as soon as reasonably practicable after the Company has filed or furnished them electronically with the SEC.

      The Company’s revenues are earned and cash is generated as consumer products are sold to customers in its stores. The Company earns income predominantly by selling products at price levels that produce revenues in excess of its costs to make these products available to its customers. Such costs include procurement and distribution costs, facility occupancy and operational costs, and overhead expenses.

E MPLOYEES

      The Company employs approximately 310,000 full and part-time employees. A majority of the Company’s employees are covered by collective bargaining agreements negotiated with local unions affiliated with one of several different international unions. There are approximately 320 such agreements, usually with terms of three to five years.

      During fiscal 2007, the Company has major labor contracts expiring in southern California, Cincinnati, Detroit, Houston, Memphis, Toledo, Seattle and West Virginia. Negotiations in 2007 will be challenging as the Company must have competitive cost structures in each market while meeting our associates’ needs for good wages and affordable health care.

S TORES

      As of February 3, 2007, the Company operated, either directly or through its subsidiaries, 2,468 supermarkets and multi-department stores, 631 of which had fuel centers. Approximately 39% of these supermarkets were operated in Company-owned facilities, including some Company-owned buildings on leased land. The Company’s current strategy emphasizes self-development and ownership of store real estate. The Company’s stores operate under several banners that have strong local ties and brand equity. Supermarkets are generally operated under one of the following formats: combination food and drug stores (“combo stores”); multi-department stores; price impact warehouses; or marketplace stores.

      The combo stores are the primary food store format. They are typically able to earn a return above the Company’s cost of capital by drawing customers from a 2 – 2½ mile radius. The Company believes this format is successful because the stores are large enough to offer the specialty departments that customers desire for one-stop shopping, including natural food and organic sections, pharmacies, general merchandise, pet centers and high-quality perishables such as fresh seafood and organic produce. Many combo stores include a fuel center.

      Multi-department stores are significantly larger in size than combo stores. In addition to the departments offered at a typical combo store, multi-department stores sell a wide selection of general merchandise items such as apparel, home fashion and furnishings, electronics, automotive, toys and fine jewelry. Many multi-department stores include a fuel center.

      Price impact warehouse stores offer a “no-frills, low cost” warehouse format and feature everyday low prices plus promotions for a wide selection of grocery and health and beauty care items. Quality meat, dairy, baked goods and fresh produce items provide a competitive advantage. The average size of a price impact warehouse store is similar to that of a combo store.


      In addition to supermarkets, the Company operates, either directly or through subsidiaries, 779 convenience stores and 412 fine jewelry stores. Substantially all of our fine jewelry stores are operated in leased locations. Subsidiaries operated 687 of the convenience stores, while 92 were operated through franchise agreements. Approximately 44% of the convenience stores operated by subsidiaries were operated in Company-owned facilities. The convenience stores offer a limited assortment of staple food items and general merchandise and, in most cases, sell gasoline.

S EGMENTS

      The Company operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores throughout the United States. The Company’s retail operations, which represent substantially all of the Company’s consolidated sales, earnings and total assets, are its only reportable segment. All of the Company’s operations are domestic. Revenues, profit and losses, and total assets are shown in the Company’s Consolidated Financial Statements set forth in Item 8 below.

M ERCHANDISING AND M ANUFACTURING

      Corporate brand products play an important role in the Company’s merchandising strategy. Supermarket divisions typically stock approximately 11,000 private label items. The Company’s corporate brand products are produced and sold in three quality “tiers.” Private Selection is the premium quality brand designed to be a unique item in a category or to meet or beat the “gourmet” or “upscale” brands. The “banner brand” (Kroger, Ralphs, King Soopers, etc.), which represents the majority of the Company’s private label items, is designed to be equal to or better than the national brand and carries the “Try It, Like It, or Get the National Brand Free” guarantee. Kroger Value is the value brand, designed to deliver good quality at a very affordable price.

      Approximately 55% of the corporate brand units sold are produced in the Company’s manufacturing plants; the remaining corporate brand items are produced to the Company’s strict specifications by outside manufacturers. The Company performs a “make or buy” analysis on corporate brand products and decisions are based upon a comparison of market-based transfer prices versus open market purchases. As of February 3, 2007, the Company operated 42 manufacturing plants. These plants consisted of 18 dairies, 11 deli or bakery plants, five grocery product plants, three beverage plants, three meat plants and two cheese plants.

E XECUTIVE O FFICERS OF THE R EGISTRANT

      The disclosure regarding executive officers is set forth in Item 10 of Part III of this Form 10-K under the heading “Executive Officers of the Company,” and is incorporated herein by reference.


ITEM 1A.       RISK FACTORS.

      There are risks and uncertainties that can affect our business. The significant risk factors are discussed below. Please also see the “Outlook” section in Item 7 of this Form 10-K for forward-looking statements and factors that could cause us not to realize our goals or meet our expectations.

C OMPETITIVE E NVIRONMENT

      The operating environment for the food retailing industry continues to be characterized by intense price competition, aggressive supercenter expansion, increasing fragmentation of retail formats, entry of non-traditional competitors and market consolidation. Additionally, consumers are increasingly looking to restaurants to fulfill their food product needs. We have developed a strategic plan that we believe is a balanced approach that will enable Kroger to meet the wide-ranging needs and expectations of our customers. However, the nature and extent to which our competitors implement various pricing and promotional activities in response to increasing competition - including our execution of our strategic plan - and our response to these competitive actions, can adversely affect our profitability.

F OOD S AFETY

      Customers count on Kroger to provide them with wholesome food products. Concerns regarding the safety of food products sold by Kroger could cause shoppers to avoid purchasing certain products from us, or to seek alternative sources of supply for all of their food needs, even if the basis for the concern is outside of our control. Any lost confidence on the part of our customers would be difficult and costly to reestablish. As such, any issue regarding the safety of any food items sold by Kroger, regardless of the cause, could have a substantial and adverse effect on our operations.

L ABOR R ELATIONS

      A significant majority of our employees are covered by collective bargaining agreements with unions, and our relationship with those unions, including any work stoppages, could have an adverse impact on our financial results.

      We are a party to approximately 320 collective bargaining agreements. We have major contracts expiring in 2007 in southern California, Cincinnati, Detroit, Houston, Memphis, Toledo, Seattle and West Virginia. In future negotiations with labor unions, we expect that rising health care, pension and employee benefit costs, among other issues, will continue to be important topics for negotiation. Upon the expiration of our collective bargaining agreements, work stoppages by the affected workers could occur if we are unable to negotiate acceptable contracts with labor unions. This could significantly disrupt our operations. Further, if we are unable to control health care, pension and wage costs, or gain operational flexibility under our collective bargaining agreements, we may experience increased operating costs and an adverse impact on future results of operations.

S TRATEGY E XECUTION

      Our strategy focuses on improving our customers’ shopping experience through enhanced service, product selection and value. Successful execution of this strategy requires a balance between sales growth and earnings growth. Maintaining this strategy requires the ability to identify and execute plans to generate cost savings and productivity improvements that can be invested in the merchandising and pricing initiatives necessary to support our customer-focused programs, as well as recognizing and implementing organizational changes as required. If we are unable to execute our plans, or if our plans fail to meet our customers’ expectations, our sales and earnings growth expectations could be adversely affected.

D ATA AND T ECHNOLOGY

      Our business is increasingly dependent on information technology systems that are complex and vital to continuing operations. If we were to experience difficulties maintaining existing systems or implementing new systems, we could incur significant losses due to disruptions in our operations. Additionally, these systems contain valuable proprietary data that, if breached, would have an adverse effect on Kroger.


I NDEBTEDNESS

      As of year-end 2006, Kroger’s outstanding indebtedness, including capital leases and financing obligations, totaled approximately $7.1 billion. This indebtedness could reduce our ability to obtain additional financing for working capital, acquisitions or other purposes and could make us more vulnerable to economic downturns and competitive pressures. If debt markets do not permit us to refinance certain maturing debt, we may be required to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness. Changes in our credit ratings, or in the interest rate environment, could have an adverse effect on our financing costs and structure.

L EGAL P ROCEEDINGS

      From time to time, we are a party to legal proceedings, including matters involving personnel and employment issues, personal injury, antitrust claims and other proceedings. Some of these proceedings, including product liability cases, could result in a substantial loss to Kroger in the event that other potentially responsible parties are unable (for financial reasons or otherwise) to satisfy a judgment entered against them. Others purport to be brought as class actions on behalf of similarly situated parties. We estimate our exposure to these legal proceedings and establish accruals for the estimated liabilities. Assessing and predicting the outcome of these matters involves substantial uncertainties. While we currently do not expect any outstanding legal proceedings to have a material effect on the financial condition of Kroger, unexpected outcomes in these legal proceedings, or changes in our evaluations or predictions about the proceedings, could have a material adverse effect on our financial results. Please also refer to the “Legal Proceedings” section in Item 3 below.

M ULTI -E MPLOYER P OST -R ETIREMENT O BLIGATIONS

      As discussed in more detail below in “Management’s Discussion and Analysis of Financial Condition and Results of Operation-Critical Accounting Policies- Post-Retirement Benefit Plans ,” Kroger contributes to several multi-employer pension plans based on obligations arising under collective bargaining agreements with unions representing employees covered by those agreements. In addition to future contribution obligations that Kroger may have under those plans, there is a risk that the agencies that rate Kroger’s outstanding debt instruments could view the underfunded nature of these plans unfavorably when determining their ratings on the Company’s debt securities. Any downgrading of Kroger’s debt ratings likely would increase Kroger’s cost of borrowing.

I NSURANCE

      We use a combination of insurance and self-insurance to provide for potential liability for workers’ compensation, automobile and general liability, property, director and officers’ liability, and employee health care benefits. Any actuarial projection of losses is subject to a high degree of variability. Changes in legal trends and interpretations, variability in inflation rates, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, and changes in discount rates could all affect ultimate settlements of claims.

ITEM 1B.       UNRESOLVED STAFF COMMENTS.

      None.


ITEM 2.       PROPERTIES.

      As of February 3, 2007, the Company operated more than 3,500 owned or leased supermarkets, convenience stores, fine jewelry stores, distribution warehouses and food processing facilities through divisions, subsidiaries or affiliates. These facilities are located throughout the United States. A majority of the properties used to conduct the Company’s business are leased.

      The Company generally owns store equipment, fixtures and leasehold improvements, as well as processing and manufacturing equipment. The total cost of the Company’s owned assets and capitalized leases at February 3, 2007, was $20,982 million while the accumulated depreciation was $9,203 million.

      Leased premises generally have base terms ranging from ten-to-twenty years with renewal options for additional periods. Some options provide the right to purchase the property after conclusion of the lease term. Store rentals are normally payable monthly at a stated amount or at a guaranteed minimum amount plus a percentage of sales over a stated dollar volume. Rentals for the distribution, processing and miscellaneous facilities generally are payable monthly at stated amounts. For additional information on lease obligations, see Note 8 to the Consolidated Financial Statements.

ITEM 3.       LEGAL PROCEEDINGS.

      On October 6, 2006, the Company petitioned the Tax Court ( In Re: Ralphs Grocery Company and Subsidiaries, formerly known as Ralphs Supermarkets, Inc., Docket No. 20364-06 ) for a redetermination of deficiencies set by the Commissioner of Internal Revenue. The dispute at issue involves a 1992 transaction in which Ralphs Holding Company acquired the stock of Ralphs Grocery Company and made an election under Section 338(h)(10) of the Internal Revenue Code. The Commissioner has determined that the acquisition of the stock was not a purchase as defined by Section 338(h)(3) of the Internal Revenue Code and that the acquisition does not qualify as a purchase. The Company has strong arguments in favor of its position, but due to the inherent uncertainty involved in the litigation process, an adverse decision that could have a material adverse effect on the Company’s financial results is a possible outcome. As of February 3, 2007, an adverse decision would require a cash payment of approximately $363 million, including interest.

      On February 2, 2004, the Attorney General for the State of California filed an action in Los Angeles federal court ( California, ex rel Lockyer v. Safeway, Inc. dba Vons, a Safeway Company; Albertson’s, Inc. and Ralphs Grocery Company, a division of The Kroger Co. , United States District Court Central District of California, Case No. CV04-0687) alleging that the Mutual Strike Assistance Agreement (the “Agreement”) between the Company, Albertson’s, Inc. and Safeway Inc. (collectively, the “Retailers”), which was designed to prevent the union from placing disproportionate pressure on one or more of the Retailers by picketing such Retailer(s) but not the other Retailer(s) during the labor dispute in southern California, violated Section 1 of the Sherman Act. The lawsuit seeks declarative and injunctive relief. On May 25, 2005, the Court denied a motion for a summary judgment filed by the defendants. Ralphs and the other defendants filed a notice of an interlocutory appeal to the United States Court of Appeals for the Ninth Circuit. On November 29, 2005, the appellate court dismissed the appeal. On December 7, 2006, the Court denied a motion for summary judgment filed by the State of California. The Company continues to believe it has strong defenses against this lawsuit and is vigorously defending it. Although this lawsuit is subject to uncertainties inherent to the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this action will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

      Ralphs Grocery Company is the defendant in a group of civil actions initially filed in 2003 and for which a coordination order was issued on January 20, 2004 in The Great Escape Promotion Cases pending in the Superior Court of California, County of Los Angeles, Case No. JCCP No. 4343. The plaintiffs allege that Ralphs violated various laws protecting consumers in connection with a promotion pursuant to which Ralphs offered travel awards to customers. On February 22, 2006, the Court in The Great Escape Promotion Cases issued an Order granting preliminary approval of the class action settlement. Notice of the class action settlement was sent to class members, and the Court issued an Order finally approving the class action settlement on August 25, 2006. The settlement involved the issuance of coupons and gift cards. While the ultimate cost of the settlement to Ralphs is largely dependent on the rate of coupon redemption, management does not expect that the ultimate resolution of this action will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

      On August 12, 2000, Ralphs Grocery Company, along with several other potentially responsible parties, entered into a consent decree with the U. S. Environmental Protection Agency surrounding the purported release of volatile organic compounds in connection with industrial operations at a property located in Los Angeles, California. The consent decree followed the EPA’s earlier Administrative Order No. 97-18 in which the EPA sought remedial action pursuant to its authority under the Comprehensive Environmental Remediation, Compensation and Liability Act. Under the consent decree, Ralphs contributes a share of the costs associated with groundwater extraction and treatment, which share currently totals approximately $30,000-$40,000 per year. The treatment process is expected to continue until at least 2012.


      Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material adverse effect on the Company’s financial position.

      The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made adequate provisions therefor. Nonetheless, assessing and predicting the outcomes of these matters involve substantial uncertainties. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse impact on the Company’s financial condition or results of operation.

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

      None.


PART II

ITEM 5.       MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

(a)

COMMON STOCK PRICE RANGE
  2006 2005
Quarter        High      Low      High      Low
1 st   $ 20.98 $     18.05 $     18.22 $     15.15
2 nd   $ 23.23 $     19.37 $     20.00 $     16.46
3 rd   $ 24.15 $     21.49 $     20.88 $     19.09
4 th   $ 25.96 $     21.12 $     20.58 $     18.42

Main trading market: New York Stock Exchange (Symbol KR)

Number of shareholders of record at year-end 2006:       61,920

Number of shareholders of record at March 30, 2007:     53,435

The Company did not pay dividends on its Common Stock during fiscal year 2005. During fiscal 2006, the Company’s Board of Directors adopted a dividend policy and paid three quarterly dividends of $0.065 per share. On March 1, 2007, the Company paid its fourth quarterly dividend of $0.065 per share. On March 15, 2007, the Company announced that its Board of Directors had increased the quarterly dividend to $0.075 per share, payable on June 1, 2007, to shareholders of record at the close of business on May 15, 2007.

The information regarding equity compensation plans is set forth in Item 12 of this Form 10-K and is incorporated by reference into this Item 5.

P ERFORMANCE G RAPH

     Set forth below is a line graph comparing the five-year cumulative total shareholder return on Kroger’s common stock, based on the market price of the common stock and assuming reinvestment of dividends, with the cumulative total return of companies in the Standard & Poor’s 500 Stock Index and the Peer Group composed of food and drug companies.

     Historically, our peer group has consisted of the major food store companies.  In recent years there have been significant changes in the industry, including consolidation and increased competition from supercenters and drug chains.  As a result, in 2003 we changed our peer group ( the “Peer Group”) to include companies operating supermarkets, supercenters and warehouse clubs in the United States as well as the major drug chains with which Kroger competes.



  Base   INDEXED RETURNS
  Period   Years Ending
Company Name/Index        2001        2002        2003        2004        2005        2006  
The Kroger Co.     100     74.23   91.15   84.80   91.34   128.31
S&P 500 Index   100   79.50 106.98 112.69 125.80 144.66
Peer Group   100   76.05 88.72 94.99 93.12 102.54

      Kroger’s fiscal year ends on the Saturday closest to January 31.

*       Total assumes $100 invested on February 3, 2002, in The Kroger Co., S&P 500 Index and the Peer Group, with reinvestment of dividends.
 
** The Peer Group consists of Albertson’s, Inc., Costco Wholesale Corp., CVS Corp, Delhaize Group SA (ADR), Great Atlantic & Pacific Tea Company, Inc., Koninklijke Ahold NV (ADR), Marsh Supermarkets Inc. (Class A), Safeway, Inc., Supervalu Inc., Target Corp., Wal-Mart Stores Inc., Walgreen Co., Whole Foods Market Inc. and Winn-Dixie Stores, Inc. Albertson’s, Inc., was substantially acquired by Supervalu in July 2006, and is included through 2005.  Marsh Supermarkets was acquired by Marsh Supermarkets Holding Corp. in September 2006, and is included through 2005.  Winn-Dixie Stores emerged from bankruptcy in 2006 as a new issue and returns for the old and new issue were calculated then weighted to determine 2006 return.

      Data supplied by Standard & Poor’s.

      The foregoing Performance Graph will not be deemed incorporated by reference into any other filing, absent an express reference thereto.


(c)

ISSUER PURCHASES OF EQUITY SECURITIES
        Total Number of Maximum Dollar
        Shares Value of Shares
        Purchased as that May Yet Be
        Part of Publicly Purchased Under
  Total Number Average Announced the Plans or
  of Shares Price Paid Plans or Programs (3)
Period (1)        Purchased      Per Share      Programs (2)      (in millions)
First period - four weeks                
November 5, 2006 to December 2, 2006   1,176,497   $      21.99 1,175,000   $ 297
Second period - four weeks              
December 3, 2006 to December 30, 2006   1,203,899 $ 23.18 1,200,000 $ 271
Third period - five weeks              
December 31, 2006 to February 3, 2007   2,205,944 $ 23.75 2,200,000 $ 233
 
Total   4,586,340 $ 23.15 4,575,000 $ 233

(1)       The reported periods conform to the Company’s fiscal calendar composed of thirteen 28-day periods. The fourth quarter of 2006 contained two 28-day periods and one 35-day period.
 
(2) Shares were repurchased under (i) a $500 million stock repurchase program, authorized by the Board of Directors on May 4, 2006, and (ii) a program announced on December 6, 1999, to repurchase common stock to reduce dilution resulting from our employee stock option plans, which program is limited to proceeds received from exercises of stock options and the tax benefits associated therewith. The programs have no expiration date but may be terminated by the Board of Directors at any time. Total number of shares purchased includes shares that were surrendered to the Company by participants in the Company’s long-term incentive plans to pay for taxes on restricted stock awards.
 
(3) Amounts shown in this column reflect amounts remaining under the $500 million stock repurchase program referenced in Note 2 above. Amounts to be invested under the program utilizing option exercise proceeds are dependent upon option exercise activity.


ITEM 6.       SELECTED FINANCIAL DATA.

Fiscal Years Ended
February 3, January 28, January 29, January 31, February 1,
2007 2006 2005 2004 2003
(53 weeks)      (52 weeks)      (52 weeks)      (52 weeks)      (52 weeks)
(In millions, except per share amounts)
Sales $ 66,111 $ 60,553 $ 56,434   $ 53,791   $ 51,760
Earnings (loss) before cumulative effect of accounting  
    change 1,115 958     (104 ) 285   1,218
Cumulative effect of accounting change (1)     (16 )
Net earnings (loss) 1,115 958 (104 ) 285 1,202
Diluted earnings (loss) per share:  
          Earnings (loss) before cumulative effect of accounting  
             change 1.54 1.31 (0.14 ) 0.38 1.54
          Cumulative effect of accounting change (1) (0.02 )
          Net earnings (loss) 1.54 1.31 (0.14 ) 0.38 1.52
Total assets 21,215 20,482 20,491 20,767 20,349
Long-term liabilities, including obligations under capital
    leases and financing obligations 8,711 9,377 10,537 10,515 10,569
Shareowners’ equity 4,923 4,390 3,619 4,068 3,937
Cash dividends per common share (2) 0.195

(1) Amounts are net of tax.
 
(2)     During the fiscal year ended February 2, 2002, the Company was prohibited from paying cash dividends under the terms of its previous Credit Agreement. On May 22, 2002, the Company entered into a new Credit Agreement, at which time the restriction on payment of cash dividends was eliminated.



ITEM 7.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

O UR B USINESS

      The Kroger Co. was founded in 1883 and incorporated in 1902. It is one of the nation’s largest retailers, operating 2,468 supermarket and multi-department stores under two dozen banners including Kroger, Ralphs, Fred Meyer, Food 4 Less, King Soopers, Smith’s, Fry’s, Fry’s Marketplace, Dillons, QFC and City Market. Of these stores, 631 had fuel centers. We also operate 779 convenience stores and 412 fine jewelry stores.

      Kroger operates 42 manufacturing plants, primarily bakeries and dairies, which supply approximately 55% of the corporate brand units sold in the Company’s retail outlets.

      Our revenues are earned and cash is generated as consumer products are sold to customers in our stores. We earn income predominately by selling products at price levels that produce revenues in excess of our costs to make these products available to our customers. Such costs include procurement and distribution costs, facility occupancy and operational costs, and overhead expenses. Our operations are reported as a single reportable segment: the retail sale of merchandise to individual customers.

O UR 2006 P ERFORMANCE

      The continued focus of our associates on delivering improved service, product selection and value to our customers generated a year of significantly improved identical supermarket sales growth, excluding fuel sales, in 2006. Our identical supermarket sales, excluding fuel sales, grew at 5.6% in 2006. These results followed strong 2005 identical supermarket sales, excluding fuel sales, of 3.5% in 2005 and 0.8% in 2004.

      Increasing market share helped us achieve our results. Our internal analysis shows that we hold the #1 or #2 market share position in 38 of our 44 major markets. We define a major market as one in which we operate nine or more stores. Our share increased in 36 of these 44 major markets, declined in seven and remained unchanged in one. On a volume-weighted basis, our overall market share in these 44 major markets increased approximately 65 basis points during 2006.

      We compete against a total of 1,262 supercenters, an increase of 133 over 2005. There are 34 major markets in which supercenters have achieved at least a #3 market share position. Our overall market share in these 34 major markets, on a volume-weighted basis, increased over 70 basis points during 2006. Our market share increased in 27 of these 34 major markets, declined in six and remained unchanged in one.

      All of the market share estimates described above are based on our internal data and analysis. We believe they are reliable but can provide no other assurance of reliability. We believe this market share analysis illustrates that Kroger continued to achieve significant growth in 2006, even in the face of aggressive expansion in the supermarket industry by supercenters, intense price competition, increasing fragmentation of retail formats and market consolidation. Our retail price investments, combined with our service and selling initiatives, led to these market share gains in 2006. We believe there is still significant room for growth. In our 44 major markets, we estimate approximately 47% of the share in those markets continues to be held by competitors without our economies of scale.

      We were able to balance our sales growth with earnings growth. Our net earnings increased 16.4% to $1.54 per diluted share in 2006, from $1.31 per diluted share in 2005. Earnings growth was primarily driven by strong identical supermarket sales growth, improving operating margins and fewer shares outstanding. In addition, fiscal 2006 included a 53 rd week that benefited the year by an estimated $0.07 per diluted share, adjustments to certain deferred tax balances that benefited the year by $0.03 per diluted share, expense totaling $0.03 per diluted share for increases in legal reserves, and $0.06 per diluted share of expense for the adoption of stock option expensing.

F UTURE E XPECTATIONS

      While we were pleased with our 2006 results, we must continue to adjust our business model to meet the changing needs and expectations of our customers. Our plan requires balance between sales growth, earnings growth and profitable capital investment.

      We expect to achieve identical supermarket sales growth through merchandising and operating initiatives that improve the shopping experience for our customers and continue building customer loyalty. We expect identical supermarket sales growth, excluding fuel sales, of 3%-5% in 2007.


      To the extent that these sales initiatives involve price reductions or additional costs, we expect they will be funded by operating cost reductions and productivity improvements. We expect sales improvements and cost reductions, combined with fewer shares outstanding, to drive earnings per share growth in 2007. We expect earnings per share in 2007 of $1.60-$1.65 per diluted share. This represents earnings per share growth of approximately 9%-12% in 2007, net of the effect of a 53 rd week in fiscal 2006 of approximately $0.07 per diluted share.

      In addition, on March 15, 2007, the Board of Directors declared an increase in Kroger’s quarterly dividend to $0.075 per share.

      Further discussion on our industry, the current economic environment and our related strategic plans is included in the “Outlook” section.

R ESULTS OF O PERATIONS

      The following discussion summarizes our operating results for 2006 compared to 2005 and for 2005 compared to 2004. Comparability is affected by certain income and expense items that fluctuated significantly between and among the periods, including goodwill and asset impairment charges and a labor dispute in southern California in 2004.

    Net Earnings (Loss)

      Net earnings totaled $1,115 million for 2006, compared to net earnings totaling $958 million in 2005 and a net loss totaling $104 million in 2004. The increase in our net earnings for 2006, compared to 2005 and 2004, resulted from improvements in the southern California market and the leveraging of fixed costs with strong identical supermarket sales growth, as well as the effect of a 53 rd week in 2006. In addition, 2004 was negatively affected by goodwill charges totaling $904 million, as well as a labor dispute in southern California.

      Earnings per diluted share totaled $1.54 in 2006, compared to $1.31 per share in 2005 and a net loss of $0.14 per diluted share in 2004. Net earnings in 2006 benefited by $0.07 per share due to the 53 rd week and $0.03 per share from the adjustment of certain deferred tax balances. Net earnings in 2006 also included expense of $0.03 per share recorded for legal reserves. Net earnings were reduced by $1.16 per share in 2004 due to the effects of goodwill impairment charges. Our earnings per share growth in 2006 and 2005 resulted from increased net earnings and the repurchase of Kroger stock. During fiscal 2006, we repurchased 29 million shares of Kroger stock for a total investment of $633 million. During fiscal 2005, we repurchased 15 million shares of our stock for a total investment of $252 million. During fiscal 2004, we repurchased 20 million shares of Kroger stock for a total investment of $319 million.

    Sales

  Total Sales
  (in millions)
              Percentage                   Percentage          
    2006   Increase   2005   Increase   2004
Total food store sales without fuel $ 57,712   7.9 %   $ 53,472   4.6 %   $ 51,106
Total food store fuel sales   4,455 26.3 %   3,526 53.0 %   2,305
 
Total food store sales $ 62,167 9.1 % $ 56,998 6.7 % $ 53,411
Other sales (1)   3,944 10.9 %   3,555 17.6 %   3,023
 
Total Sales $ 66,111 9.2 % $ 60,553 7.3 % $ 56,434

(1)       Other sales primarily relate to sales at convenience stores, including fuel, jewelry stores and sales by our manufacturing plants to outside firms.
 

      The growth in our total sales was primarily the result of identical store sales increases, the addition of a 53 rd week in 2006 and inflation in pharmacy and some perishable commodities. Increased transaction count and average transaction size were both responsible for our increases in identical supermarket sales, excluding retail fuel operations. After adjusting for the extra week in fiscal 2006, total sales increased 7.0% over fiscal 2005.

      We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters. Differences between total supermarket sales and identical supermarket sales primarily relate to changes in supermarket square footage. We calculate annualized identical supermarket sales based on a summation of four quarters of identical supermarket sales. Our identical supermarket sales results are summarized in the table below, based on the 53-week period of 2006, compared to the same 53-week period of the previous year.

  Identical Supermarket Sales
  (in millions)
    2006         2005
Including supermarket fuel centers   $   59,592   $   55,993  
Excluding supermarket fuel centers   $   55,399     $   52,483  
 
Including supermarket fuel centers     6.4 %     5.3 %  
Excluding supermarket fuel centers     5.6 %     3.5 %  

      We define a supermarket as comparable when it has been in operation for five full quarters, including expansions and relocations. We calculate annualized comparable supermarket sales based on a summation of four quarters of comparable sales. Our annualized comparable supermarket sales results are summarized in the table below, based on the 53-week period of 2006, compared to the same 53-week period of the previous year.

  Comparable Supermarket Sales
  (in millions)
    2006         2005
Including supermarket fuel centers   $   61,045   $   57,203  
Excluding supermarket fuel centers   $   56,702   $   53,622  
 
Including supermarket fuel centers     6.7 %     5.9 %  
Excluding supermarket fuel centers     5.7 %     3.9 %  

    FIFO Gross Margin

      We calculate First-In, First-Out (“FIFO”) Gross Margin as follows: Sales minus merchandise costs plus Last-In, First-Out (“LIFO”) charge (credit). Merchandise costs include advertising, warehousing and transportation, but exclude depreciation expense and rent expense. FIFO gross margin is an important measure used by our management to evaluate merchandising and operational effectiveness.

      Our FIFO gross margin rates were 24.27%, 24.80% and 25.38% in 2006, 2005 and 2004, respectively. Retail fuel sales lowered our FIFO gross margin rate due to the very low FIFO gross margin on retail fuel sales as compared to non-fuel sales. Excluding the effect of retail fuel operations, our FIFO gross margin rates were 26.43%, 26.69% and 26.73% in 2006, 2005 and 2004, respectively. The decrease in our non-fuel FIFO gross margin rate reflects our continued reinvestment of operating cost savings into lower prices for our customers.

    Operating, General and Administrative Expenses

      Operating, general and administrative (“OG&A”) expenses consist primarily of employee-related costs such as wages, health care benefit costs and retirement plan costs. Among other items, rent expense, depreciation and amortization expense, and interest expense are not included in OG&A.

      OG&A expenses, as a percent of sales, were 17.91%, 18.21% and 18.76% in 2006, 2005 and 2004, respectively. The growth in our retail fuel sales lowers our OG&A rate due to the very low OG&A rate on retail fuel sales as compared to non-fuel sales. Excluding the effect of retail fuel operations, our OG&A expenses, as a percent of sales, were 19.59%, 19.68% and 19.81% in 2006, 2005 and 2004, respectively. Excluding the effect of retail fuel operations, expenses recorded for legal reserves and stock option expense, our OG&A rate declined 28 basis points in 2006. This decrease was driven by identical store sales growth, by increasing store labor productivity, and by progress we have made in controlling our health care costs. These improvements were partially offset by increases in pension expense and credit card fees. 


    Rent Expense

      Rent expense was $649 million in 2006, as compared to $661 million and $680 million in 2005 and 2004, respectively. Rent expense, as a percent of sales, was 0.98% in 2006, as compared to 1.09% in 2005 and 1.21% in 2004. The decrease in rent expense reflects our increasing sales leverage and our continued emphasis on ownership of real estate when available, as well as decreased charges for closed-store future rent liabilities in 2006 and 2005 compared to 2004.

    Depreciation and Amortization Expense

      Depreciation and amortization expense was $1,272 million, $1,265 million and $1,256 million for 2006, 2005 and 2004, respectively. The increases in depreciation and amortization expense were the result of capital expenditures totaling $1,777 million, $1,306 million and $1,634 million in 2006, 2005 and 2004, respectively. Depreciation and amortization expense, as a percent of sales, was 1.92%, 2.09% and 2.23% in 2006, 2005 and 2004, respectively. The decrease in our depreciation and amortization expense, as a percent of sales, is primarily the result of total sales increases.

    Interest Expense

      Net interest expense totaled $488 million, $510 million and $557 million for 2006, 2005 and 2004, respectively. The decrease in interest expense was the result of lower average borrowings. During 2006, we reduced total debt $173 million from $7.2 billion as of January 28, 2006, to $7.1 billion as of February 3, 2007. Interest expense in 2004 included $25 million related to the early retirement of debt.

    Income Taxes

      Our effective income tax rate was 36.2%, 37.2% and 136.4% for 2006, 2005 and 2004, respectively. The effective tax rates for 2006 and 2005 differ from the effective tax rate for 2004 due to the impairment of non-deductible goodwill in 2004. The effective income tax rates also differ from the expected federal statutory rate in all years presented due to the effect of state taxes as well as the adjustment of certain deferred tax balances in 2006.

      During the reconciliation of our deferred tax balances, after the filing of annual federal and state tax returns, we identified adjustments to be made in the previous years’ deferred tax reconciliation. We corrected these deferred tax balances in our Consolidated Financial Statements for the year ended February 3, 2007, which resulted in a reduction of our 2006 provision for income tax expense of approximately $21 million and reduced the rate by 120 basis points. We do not believe these adjustments are material to our Consolidated Financial Statements for the year ended February 3, 2007, or to any prior years’ Consolidated Financial Statements. As a result, we have not restated any prior year amounts.

C OMMON S TOCK R EPURCHASE P ROGRAM

      We maintain a stock repurchase program that complies with Securities Exchange Act Rule 10b5-1 to allow for the orderly repurchase of our common stock, from time to time. We made open market purchases totaling $374 million, $239 million and $291 million under this repurchase program during fiscal 2006, 2005 and 2004, respectively. In addition to this repurchase program, in December 1999 we began a program to repurchase common stock to reduce dilution resulting from our employee stock option plans. This program is solely funded by proceeds from stock option exercises, including the tax benefit from these exercises. We repurchased approximately $259 million, $13 million and $28 million under the stock option program during 2006, 2005 and 2004, respectively.


C APITAL E XPENDITURES

      Capital expenditures, including changes in construction-in-progress payable and excluding acquisitions, totaled $1,777 million in 2006 compared to $1,306 million in 2005 and $1,634 million in 2004. The decline in 2005 was the result of our emphasis on the tightening of capital and increasing our focus on remodels, merchandising and productivity projects. The table below shows our supermarket storing activity and our total food store square footage:

  Supermarket Storing Activity
    2006         2005         2004
Beginning of year   2,507   2,532   2,532  
Opened   20   28   41  
Opened (relocation)   17   12   20  
Acquired   1   1   15  
Acquired (relocation)       3  
Closed (operational)   (60 )   (54 )   (56 )  
Closed (relocation)   (17 )   (12 )   (23 )  
 
End of year   2,468   2,507   2,532  
 
Total food store square footage (in millions)   142   142   141  

C RITICAL A CCOUNTING P OLICIES

      We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Our significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements.

      The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

      We believe that the following accounting policies are the most critical in the preparation of our financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.

    Self-Insurance Costs

      We primarily are self-insured for costs related to workers’ compensation and general liability claims. The liabilities represent our best estimate, using generally accepted actuarial reserving methods, of the ultimate obligations for reported claims plus those incurred but not reported for all claims incurred through February 3, 2007. Case reserves are established for reported claims using case-basis evaluation of the underlying claim data and are updated as information becomes known.

      For both workers’ compensation and general liability claims, we have purchased stop-loss coverage to limit our exposure to any significant exposure on a per claim basis. We are insured for covered costs in excess of these per claim limits. The liabilities for workers’ compensation claims are accounted for on a present value basis utilizing a risk-adjusted discount rate. A 25 basis point decrease in our discount rate would increase our liability by approximately $3 million. General liability claims are not discounted.

      We are also similarly self-insured for property-related losses. We have purchased stop-loss coverage to limit our exposure to losses in excess of $25 million on a per claim basis, except in the case of an earthquake, for which stop-loss coverage is in excess of $50 million per claim, up to $200 million per claim in California and $300 million outside of California.


      The assumptions underlying the ultimate costs of existing claim losses are subject to a high degree of unpredictability, which can affect the liability recorded for such claims. For example, variability in inflation rates of health care costs inherent in these claims can affect the amounts realized. Similarly, changes in legal trends and interpretations, as well as a change in the nature and method of how claims are settled can affect ultimate costs. Our estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, and any changes could have a considerable effect upon future claim costs and currently recorded liabilities.

    Impairments of Long-Lived Assets

      In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , we monitor the carrying value of long-lived assets for potential impairment each quarter based on whether certain trigger events have occurred. These events include current period losses combined with a history of losses or a projection of continuing losses or a significant decrease in the market value of an asset. When a trigger event occurs, we perform an impairment calculation, comparing projected undiscounted cash flows, utilizing current cash flow information and expected growth rates related to specific stores, to the carrying value for those stores. If we identify impairment for long-lived assets to be held and used, we compare discounted future cash flows to the asset’s current carrying value. We record impairment when the carrying value exceeds the discounted cash flows. With respect to owned property and equipment held for disposal, we adjust the value of the property and equipment to reflect recoverable values based on our previous efforts to dispose of similar assets and current economic conditions. We recognize impairment for the excess of the carrying value over the estimated fair market value, reduced by estimated direct costs of disposal. We record costs to reduce the carrying value of long-lived assets in the Consolidated Statements of Operations as “Operating, general and administrative” expense.

      The factors that most significantly affect the impairment calculation are our estimates of future cash flows. Our cash flow projections look several years into the future and include assumptions on variables such as inflation, the economy and market competition. Application of alternative assumptions and definitions, such as reviewing long-lived assets for impairment at a different organizational level, could produce significantly different results.

    Goodwill

      We review goodwill for impairment during the fourth quarter of each year, and also upon the occurrence of trigger events. The reviews are performed at the operating division level. Generally, fair value represents a multiple of earnings, or discounted projected future cash flows, and we compare fair value to the carrying value of a division for purposes of identifying potential impairment. We base projected future cash flows on management’s knowledge of the current operating environment and expectations for the future. If we identify potential for impairment, we measure the fair value of a division against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the division’s goodwill. We recognize goodwill impairment for any excess of the carrying value of the division’s goodwill over the implied fair value. Results of the goodwill impairment reviews performed during 2006, 2005 and 2004 are summarized in Note 2 to the Consolidated Financial Statements.

      The annual impairment review requires the extensive use of accounting judgment and financial estimates. Application of alternative assumptions and definitions, such as reviewing goodwill for impairment at a different organizational level, could produce significantly different results. Similar to our policy on impairment of long-lived assets, the cash flow projections embedded in our goodwill impairment reviews can be affected by several items such as inflation, the economy and market competition.

    Intangible Assets

      In addition to goodwill, we have recorded intangible assets totaling $26 million, $22 million and $28 million for leasehold equities, liquor licenses and pharmacy prescription file purchases, respectively, at February 3, 2007. Balances at January 28, 2006, were $35 million, $20 million and $30 million for lease equities, liquor licenses and pharmacy prescription files, respectively. We amortize leasehold equities over the remaining life of the lease. We do not amortize owned liquor licenses, however, we amortize liquor licenses that must be renewed over their useful lives. We amortize pharmacy prescription file purchases over seven years. We consider these assets annually during our testing for impairment.

    Store Closing Costs

      We provide for closed store liabilities relating to the present value of the estimated remaining noncancellable lease payments after the closing date, net of estimated subtenant income. We estimate the net lease liabilities using a discount rate to calculate the present value of the remaining net rent payments on closed stores. The closed store lease liabilities usually are paid over the lease terms associated with the closed stores, which generally have remaining terms ranging from one to 20 years. Adjustments to closed store liabilities primarily relate to changes in subtenant income and actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the change becomes known. We review store closing liabilities quarterly to ensure that any accrued amount that is not a sufficient estimate of future costs, or that no longer is needed for its originally intended purpose, is adjusted to income in the proper period. 


      We estimate subtenant income, future cash flows and asset recovery values based on our experience and knowledge of the market in which the closed store is located, our previous efforts to dispose of similar assets and current economic conditions. The ultimate cost of the disposition of the leases and the related assets is affected by current real estate markets, inflation rates and general economic conditions.

      We reduce owned stores held for disposal to their estimated net realizable value. We account for costs to reduce the carrying values of property, equipment and leasehold improvements in accordance with our policy on impairment of long-lived assets. We classify inventory write-downs in connection with store closings, if any, in “Merchandise costs.” We expense costs to transfer inventory and equipment from closed stores as they are incurred.

    Post-Retirement Benefit Plans

(a) Company-sponsored Pension Plans

      Effective February 3, 2007, we adopted the recognition and disclosure provisions of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 99, 106 and 123(R) , which required the recognition of the funded status of its retirement plans on the Consolidated Balance Sheet. We are now required to record, as a component of Accumulated Other Comprehensive Income (“AOCI”), actuarial gains or losses, prior service costs or credits and transition obligations that have not yet been recognized.

      The determination of our obligation and expense for Company-sponsored pension plans and other post-retirement benefits is dependent upon our selection of assumptions used by actuaries in calculating those amounts. Those assumptions are described in Note 14 to the Consolidated Financial Statements and include, among others, the discount rate, the expected long-term rate of return on plan assets, average life expectancy and the rate of increases in compensation and health care costs. Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense and recorded obligation in future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions, including the discount rate used and the expected return on plan assets, may materially affect our pension and other post-retirement obligations and our future expense. Note 14 to the Consolidated Financial Statements discusses the effect of a 1% change in the assumed health care cost trend rate on other post-retirement benefit costs and the related liability.

      The objective of our discount rate assumption is to reflect the rate at which the pension benefits could be effectively settled. In making this determination, we take into account the timing and amount of benefits that would be available under the plans. Our methodology for selecting the discount rate as of year-end 2006 was to match the plan’s cash flows to that of a yield curve that provides the equivalent yields on zero-coupon corporate bonds for each maturity. Benefit cash flows due in a particular year can be “settled” theoretically by “investing” them in the zero-coupon bond that matures in the same year. The discount rate is the single rate that produces the same present value of cash flows. The selection of the 5.90% discount rate as of year-end 2006 represents the equivalent single rate under a broad-market AA yield curve constructed by our outside consultant, Mercer Human Resource Consulting. We utilized a discount rate of 5.70% for year-end 2005. The 20 basis point increase in the discount rate decreased the projected pension benefit obligation as of February 3, 2007, by approximately $68 million.

      To determine the expected return on pension plan assets, we consider current and forecasted plan asset allocations as well as historical and forecasted returns on various asset categories. For 2006 and 2005, we assumed a pension plan investment return rate of 8.5%. Our pension plan’s average return was 9.7% for the 10 calendar years ended December 31, 2006, net of all investment management fees and expenses. Our actual return for the pension plan calendar year ending December 31, 2006, on that same basis, was 13.4%. We believe the pension return assumption is appropriate because we do not expect that future returns will achieve the same level of performance as the historical average annual return. We have been advised that during 2007 and 2008, the trustees plan to reduce from 50% to 42% the allocation of pension plan assets to domestic and international equities and increase from 18% to 27% the allocation to non-core assets, including inflation-linked bonds, commodities, hedge funds and real estate. Furthermore, in order to augment the return on domestic equities and investment grade debt securities during 2007 and 2008, the trustees plan to increase hedge funds within these sectors from 7% to 22%. Collectively, these changes should improve the diversification of pension plan assets. The trustees expect these changes will have little effect on the total return but will reduce the expected volatility of the return. See Note 14 to the Consolidated Financial Statements for more information on the asset allocations of pension plan assets.


      Sensitivity to changes in the major assumptions used in the calculation of Kroger’s pension plan liabilities for the Qualified Plans is illustrated below (in millions). 

            Projected Benefit          
    Percentage   Obligation   Expense
    Point Change   Decrease/(Increase)   Decrease/(Increase)
Discount Rate   +/- 1.0 %   $   350/($306 )   $   38/($36 )  
Expected Return on Assets   +/- 1.0 %       $     21/($21 )  

      In 2005, we updated the mortality table used to determine average life expectancy in the calculation of our pension obligation to the RP-2000 Projected to 2015 mortality table. The change in this assumption increased our projected benefit obligation by approximately $93 million at the time of the change, and is reflected in unrecognized actuarial (gain) loss as of the measurement date.

      We contributed $150 million, $300 million and $35 million to our Company-sponsored pension plans in 2006, 2005 and 2004, respectively. Although we are not required to make cash contributions to our Company-sponsored pension plans during fiscal 2007, we contributed $50 million to the plans on February 5, 2007. We may elect to make additional voluntary contributions to our Company-sponsored pension plans in order to maintain our desired funding status. Additional contributions may be made if our cash flows from operations exceed our expectations. We expect any elective contributions made during 2007 will decrease our required contributions in future years. Among other things, investment performance of plan assets, the interest rates required to be used to calculate the pension obligations, and future changes in legislation, will determine the amounts of any additional contributions.

      Effective January 1, 2007, the Cash Balance Plan was replaced with a 401(k) Retirement Savings Account Plan, which will provide both Company matching contributions and other Company contributions based upon length of service, to eligible employees. We expect to make matching contributions in 2007 of approximately 75 million.

(b) Multi-Employer Plans

      We also contribute to various multi-employer pension plans based on obligations arising from most of our collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed in equal number by employers and unions. The trustees typically are responsible for determining the level of benefits to be provided to participants as well as for such matters as the investment of the assets and the administration of the plans.

      We recognize expense in connection with these plans as contributions are funded, in accordance with GAAP. We made contributions to these plans, and recognized expense, of $204 million in 2006, $196 million in 2005, and $180 million in 2004. We estimate we would have contributed an additional $2 million in 2004 but our obligation to contribute was suspended during the southern California labor dispute.

      Based on the most recent information available to us, we believe that the present value of actuarially accrued liabilities in most or all of these multi-employer plans substantially exceeds the value of the assets held in trust to pay benefits. We have attempted to estimate the amount by which these liabilities exceed the assets, (i.e., the amount of underfunding), as of December 31, 2006. Because Kroger is only one of a number of employers contributing to these plans, we also have attempted to estimate the ratio of Kroger’s contributions to the total of all contributions to these plans in a year as a way of assessing Kroger’s “share” of the underfunding. As of December 31, 2006, we estimate that Kroger’s share of the underfunding of multi-employer plans to which Kroger contributes was $600 million to $800 million, pre-tax, or $375 million to $500 million, after-tax. This represents a decrease in the amount of underfunding estimated as of December 31, 2005. This decrease is attributable to, among other things, the continuing benefit of plan design changes and the investment returns on assets held in trust for the plans during 2006. Our estimate is based on the best information available to us including actuarial evaluations and other data (that include the estimates of others), and such information may be outdated or otherwise unreliable. Our estimate is imprecise and not necessarily reliable.

      We have made and disclosed this estimate not because this underfunding is a direct liability of Kroger. Rather, we believe the underfunding is likely to have important consequences. We expect our contributions to these multi-employer plans will continue to increase each year, and therefore the expense we recognize under GAAP will increase. In 2006, our contributions to these plans increased approximately 4% over the prior year and have grown at a compound annual rate of approximately 6% since 2003. We expect our contributions to increase by approximately 1.0% in 2007. The amount of increases in 2007 and beyond has been favorably affected by significant improvement in the values of assets held in trusts, by the labor agreements negotiated in southern California and elsewhere in recent years, and by related trustee actions. Although underfunding can result in the imposition of excise taxes on contributing employers, increased contributions can reduce underfunding so that excise taxes are not triggered. Our estimate of future contribution increases takes into account the avoidance of those taxes. Finally, underfunding means that, in the event we were to exit certain markets or otherwise cease making contributions to these funds, we could trigger a substantial withdrawal liability. Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with SFAS No. 87, Employers’ Accounting for Pensions .  


      The amount of underfunding described above is an estimate and is disclosed for the purpose described. The amount could decline, and Kroger’s future expense would be favorably affected, if the values of net assets held in the trust significantly increase or if further changes occur through collective bargaining, trustee action or favorable legislation. On the other hand, Kroger’s share of the underfunding would increase and Kroger’s future expense could be adversely affected if net asset values decline, if employers currently contributing to these funds cease participation or if changes occur through collective bargaining, trustee action or adverse legislation.

    Deferred Rent

      We recognize rent holidays, including the time period during which we have access to the property for construction of buildings or improvements, as well as construction allowances and escalating rent provisions on a straight-line basis over the term of the lease. The deferred amount is included in Other Current Liabilities and Other Long-Term Liabilities on the Consolidated Balance Sheets.

    Tax Contingencies

      Various taxing authorities periodically audit our income tax returns. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, we record allowances for probable exposures. A number of years may elapse before a particular matter, for which we have established an allowance, is audited and fully resolved. As of February 3, 2007, tax years 2002 through 2004 were undergoing examination by the Internal Revenue Service.

      The establishment of our tax contingency allowances relies on the judgment of management to estimate the exposures associated with our various filing positions. Although management believes those estimates and judgments are reasonable, actual results could differ, resulting in gains or losses that may be material to our Consolidated Statements of Operations.

      To the extent that we prevail in matters for which allowances have been established, or are required to pay amounts in excess of these allowances, our effective tax rate in any given financial statement period could be materially affected. An unfavorable tax settlement could require use of cash and result in an increase in our effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution.

    Share-Based Compensation Expense

      Effective January 29, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment , using the modified prospective transition method and, therefore, have not restated results for prior periods. Under this method, we recognize compensation expense for all share-based payments granted on or after January 29, 2006, as well as all share-based payments granted prior to, but not yet vested as of, January 29, 2006, in accordance with SFAS No. 123(R). Under the fair value recognition provisions of SFAS No. 123(R), we recognize share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award.

      Prior to the adoption of SFAS No. 123(R), we accounted for share-based payments under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees and the disclosure provisions of SFAS No. 123, as amended. We recognized compensation expense for all share-based awards described above using the straight-line attribution method applied to the fair value of each option grant, over the requisite service period associated with each award. The requisite service period is typically consistent with the vesting period, except as noted below. Because awards typically vest evenly over the requisite service period, compensation cost recognized in 2006 is at least equal to the grant-date fair value of the vested portion of all outstanding options.

      The weighted-average fair value of stock options granted during 2006, 2005 and 2004 was $6.90, $7.70 and $7.91, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model, based on the assumptions shown in the table below. The Black-Scholes model utilizes extensive accounting judgment and financial estimates, including the term employees are expected to retain their stock options before exercising them, the volatility of our stock price over that expected term, the dividend yield over the term and the number of awards expected to be forfeited before they vest. Using alternative assumptions in the calculation of fair value would produce fair values for stock option grants that could be different than those used to record share-based compensation expense in the Consolidated Statements of Operations.


      The following table reflects the weighted-average assumptions used for grants awarded to option holders.

    2006         2005         2004
Weighted average expected volatility   27.60 %   30.83 %   30.13 %  
Weighted average risk-free interest rate   5.07 %   4.11 %   3.99 %  
Expected dividend yield   1.50 %   N/A   N/A  
Expected term   7.5 years   8.7 years   8.7 years  

      The weighted-average risk-free interest rate was based on the yield of a treasury note as of the grant date, continuously compounded, which matures at a date that approximates the expected term of the options. Prior to 2006, we did not pay a dividend, so an expected dividend rate was not included in the determination of fair value for options granted during fiscal year 2005. Using a dividend yield of 1.50% to value options issued in 2005 would have decreased the fair value of each option by approximately $1.60. We determined expected volatility based upon historical stock volatilities. We also considered implied volatility. We determined expected term based upon a combination of historical exercise and cancellation experience, as well as estimates of expected future exercise and cancellation experience.

      Under SFAS No. 123(R), we record expense for restricted stock awards in an amount equal to the fair market value of the underlying stock on the grant date of the award.

      In 2006, we recognized total stock compensation expense of $72 million. This included $50 million for stock options and $22 million for restricted shares. A total of $18 million of the restricted stock expense was attributable to the wider distribution of restricted shares incorporated into the first quarter 2006 grant of share-based awards (as described in Note 10 to the Consolidated Financial Statements), and the remaining $4 million of restricted stock expense related to previously issued restricted stock awards. The incremental compensation expense attributable to the adoption of SFAS No. 123(R) in 2006 was $68 million, pre-tax, or $43 million and $0.06 per diluted share, after tax. In 2005, we recognized stock compensation cost of $7 million, pre-tax, related entirely to restricted stock grants.

      These costs were recognized as operating, general and administrative costs in our Company’s Consolidated Statements of Operations. The cumulative effect of applying a forfeiture rate to unvested restricted shares at January 29, 2006 was not material. The pro forma earnings effect of stock options in prior years, in accordance with SFAS No. 123, is described below:

(in millions, except per share amounts)     2005         2004
Net earnings (loss), as reported   $   958   $   (104 )  
      Stock-based compensation expense included in net earnings, net of          
          income tax benefits     5     8  
      Total stock-based compensation expense determined under fair value          
          method for all awards, net of income tax benefits (1)     (34 )     (48 )  
Pro forma net earnings (loss)   $   929   $   (144 )  
 
Earnings (loss) per basic common share, as reported   $   1.32   $   (0.14 )  
Pro forma earnings (loss) per basic common share   $   1.28   $   (0.20 )  
Earnings (loss) per diluted common share, as reported   $   1.31   $   (0.14 )  
Pro forma earnings (loss) per diluted common share   $   1.27   $   (0.20 )  

(1)      Refer to Note 10 of our Consolidated Financial Statements for a summary of the assumptions used for options issued in each year at an option price equal to the fair market value of the stock at the date of the grant.

      As of February 3, 2007, we had $92 million of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under equity award plans. We expected to recognize this cost over a weighted-average period of approximately one year. The total fair value of options that vested in 2006 was $44 million.


      For share-based awards granted prior to the adoption of SFAS No. 123(R), the Company’s stock option grants generally contained retirement-eligibility provisions that caused the options to vest upon the earlier of the stated vesting date or retirement. We calculated compensation expense over the stated vesting periods, regardless of whether certain employees became retirement-eligible during the respective vesting periods. Upon the adoption of SFAS No. 123(R), we continued this method of recognizing compensation expense of awards granted prior to the adoption of SFAS No. 123(R). For awards granted on or after January 29, 2006, options vest based on the stated vesting date, even if an employee retires prior to the vesting date. However, the requisite service period ends on the employee’s retirement-eligible date. As a result, we recognize expense for stock option grants containing such retirement-eligibility provisions over the shorter of the vesting period or the period until employees become retirement-eligible (the requisite service period). As a result of retirement eligibility provisions in stock option awards granted on or after January 29, 2006, we recognized approximately $6 million of compensation expense in 2006 prior to the completion of stated vesting periods.

      Shares issued as a result of stock option exercises may be newly issued shares or reissued treasury shares. We expect to reissue shares held in treasury upon exercise of these options.

    Inventories

      Inventories are stated at the lower of cost (principally on a LIFO basis) or market. In total, approximately 98% of inventories for 2006 and 2005, respectively, were valued using the LIFO method. Cost for the balance of the inventories was determined using the first-in, first-out (“FIFO”) method. Replacement cost was higher than the carrying amount by $450 million at February 3, 2007, and by $400 million at January 28, 2006. We follow the Link-Chain, Dollar-Value LIFO method for purposes of calculating our LIFO charge or credit.

      The item-cost method of accounting to determine inventory cost before the LIFO adjustment is followed for substantially all store inventories at our supermarket divisions. This method involves counting each item in inventory, assigning costs to each of these items based on the actual purchase costs (net of vendor allowances and cash discounts) of each item and recording the actual cost of items sold. The item-cost method of accounting allows for more accurate reporting of periodic inventory balances and enables management to more precisely manage inventory and purchasing levels when compared to the methodology followed under the retail method of accounting.

      We evaluate inventory shortages throughout the year based on actual physical counts in our facilities. We record allowances for inventory shortages based on the results of recent physical counts to provide for estimated shortages from the last physical count to the financial statement date.

    Vendor Allowances

      We recognize all vendor allowances as a reduction in merchandise costs when the related product is sold. In most cases, vendor allowances are applied to the related product by item, and therefore reduce the carrying value of inventory by item. When it is not practicable to allocate vendor allowances to the product by item, vendor allowances are recognized as a reduction in merchandise costs based on inventory turns and recognized as the product is sold. We recognized approximately $3.3 billion, $3.2 billion and $3.1 billion of vendor allowances as a reduction in merchandise costs in 2006, 2005 and 2004, respectively. We recognized more than 80% of all vendor allowances in the item cost with the remainder being based on inventory turns.


L IQUIDITY AND C APITAL R ESOURCES

    Cash Flow Information

      Net cash provided by operating activities

      We generated $2,351 million of cash from operations in 2006 compared to $2,192 million in 2005 and $2,330 million in 2004. In addition to changes in net earnings, changes in our operating assets and liabilities also affect the amount of cash provided by our operating activities. During 2006, we realized a $129 million decrease in cash from changes in operating assets and liabilities, compared to a $121 million increase and a $116 million decrease during 2005 and 2004, respectively. These amounts are net of cash contributions to our Company-sponsored pension plans totaling $150 million in 2006, $300 million in 2005 and $35 million in 2004.

      The amount of cash paid for income taxes in 2006 was higher than the amounts paid in 2005 and 2004 due to higher net earnings. In addition, the bonus depreciation provision, which expired in December 2004, reduced our cash taxes by approximately $90 million in 2004. This benefit reversed in 2005 and increased our cash taxes by approximately $71 and $108 million in 2006 and 2005, respectively.

      Net cash used by investing activities

      Cash used by investing activities was $1,587 million in 2006, compared to $1,279 million in 2005 and $1,608 million in 2004. The amount of cash used by investing activities increased in 2006 due to increased capital spending, partially offset by higher proceeds from the sale of assets. Capital expenditures, including changes in construction-in-progress payables and excluding acquisitions, were $1,777 million, $1,306 million and $1,634 billion in 2006, 2005 and 2004, respectively. Refer to the Capital Expenditures section for an overview of our supermarket storing activity during the last three years.

      Net cash used by financing activities

      Financing activities used $785 million of cash in 2006 compared to $847 million in 2005 and $737 million in 2004. Lower cash payments for debt reduction in 2006 were partially offset by increased stock repurchase activities and dividend payments in 2006. We repurchased $633 million of Kroger stock in 2006 compared to $252 million in 2005 and $319 million in 2004, and paid dividends totaling $140 million in 2006.

    Debt Management

      Total debt, including both the current and long-term portions of capital leases and financing obligations, decreased $173 million to $7.1 billion as of year-end 2006 from $7.2 billion as of year-end 2005. Total debt decreased $739 million to $7.2 billion as of year-end 2005 from $8.0 billion as of year-end 2004. The decreases were primarily the result of using cash flow from operations to reduce outstanding debt.

      Our total debt balances were also affected by our prefunding of employee benefit costs and by the mark-to-market adjustments necessary to record fair value interest rate hedges of our fixed rate debt, pursuant to SFAS No. 133 Accounting for Derivative Investments and Hedging Activities , as amended. We had prefunded employee benefit costs of $300 million at year-end 2006, 2005 and 2004. The mark-to-market adjustments increased the carrying value of our debt by $17 million, $27 million and $70 million as of year-end 2006, 2005 and 2004, respectively.

    Factors Affecting Liquidity

      We currently borrow on a daily basis approximately $170 million under our F2/P2/A3 rated commercial paper (“CP”) program. These borrowings are backed by our credit facility, and reduce the amount we can borrow under the credit facility. We have capacity available under our credit facility to backstop all CP amounts outstanding. If our credit rating declined below its current level of BBB/Baa2/BBB-, the ability to borrow under our current CP program could be adversely affected for a period of time immediately following the reduction of our credit rating. This could require us to borrow additional funds under the credit facility, under which we believe we have sufficient capacity. Borrowings under the credit facility may be more costly than the money we borrow under our current CP program, depending on the current interest rate environment. However, in the event of a ratings decline, we do not anticipate that access to the CP markets currently available to us would be significantly limited for an extended period of time (i.e., in excess of 30 days). Although our ability to borrow under the credit facility is not affected by our credit rating, the interest cost on borrowings under the credit facility would be affected by a decrease in our credit rating or a decrease in our Applicable Percentage Ratio.


      Our credit facility also requires the maintenance of a Leverage Ratio and a Fixed Charge Coverage Ratio (our “financial covenants”). A failure to maintain our financial covenants would impair our ability to borrow under the credit facility. These financial covenants and ratios are described below:

  • Our Applicable Percentage Ratio (the ratio of Consolidated EBITDA to Consolidated Total Interest Expense, as defined in the credit facility) was 7.50 to 1 as of February 3, 2007. Upon furnishing notice to the lenders, this ratio will entitle us to a 0.05% reduction in fees under the credit facility. Although our current borrowing rate is determined based on our Applicable Percentage Ratio, under certain circumstances that borrowing rate could be determined by reference to our credit ratings.
     
  • Our Leverage Ratio (the ratio of Net Debt to Consolidated EBITDA, as defined in the credit facility) was 2.04 to 1 as of February 3, 2007. If this ratio exceeded 3.50 to 1, we would be in default of our credit facility and our ability to borrow under the facility would be impaired.
     
  • Our Fixed Charge Coverage Ratio (the ratio of Consolidated EBITDA plus Consolidated Rental Expense to Consolidated Cash Interest Expense plus Consolidated Rental Expense, as defined in the credit facility) was 3.66 to 1 as of February 3, 2007. If this ratio fell below 1.70 to 1, we would be in default of our credit facility and our ability to borrow under the facility would be impaired.

      Consolidated EBITDA, as defined in our credit facility, includes an adjustment for unusual gains and losses. Our credit agreement is more fully described in Note 5 to the Consolidated Financial Statements. We were in compliance with our financial covenants at year-end 2006.

      The tables below illustrate our significant contractual obligations and other commercial commitments, based on year of maturity or settlement, as of February 3, 2007 (in millions of dollars):

    2007     2008     2009     2010     2011     Thereafter     Total
Contractual Obligations
Long-term debt   $ 878   $ 993   $ 912 $ 42 $ 537 $ 3,219 $ 6,581
Interest on long-term debt (1) 428 332 304   250 222 1,712 3,248
Capital lease obligations 57 54 52   51 49 294 557
Operating lease obligations 778 734 690 642 587   4,118 7,549
Low-income housing obligations 6 2 8
Financed lease obligations 11 11 11 11 11 157 212
Construction commitments 190   190
Purchase obligations   431   56   46   34   23   16   606
 
Total $ 2,779 $ 2,182 $ 2,015 $ 1,030 $ 1,429 $ 9,516 $ 18,951
 
Other Commercial Commitments
Credit facility $ 352 $ $ $ $ $ $ 352
Standby letters of credit 331 331
Surety bonds   53 53
Guarantees     6             6
 
Total $ 742 $ $ $ $ $ $ 742

(1)       Amounts include contractual interest payments using the interest rate as of February 3, 2007 applicable to our variable interest debt instruments, excluding commercial paper borrowings due to the short-term nature of these borrowings, and stated fixed interest rates for all other debt instruments.


      Our construction commitments include funds owed to third parties for projects currently under construction. These amounts are reflected in other current liabilities in our Consolidated Balance Sheets.

      Our purchase obligations include commitments to be utilized in the normal course of business, such as several contracts to purchase raw materials utilized in our manufacturing plants and several contracts to purchase energy to be used in our stores and manufacturing facilities. Our obligations also include management fees for facilities operated by third parties. Any upfront vendor allowances or incentives associated with outstanding purchase commitments are recorded as either current or long-term liabilities in our Consolidated Balance Sheets.

      As of February 3, 2007, we maintained a five-year revolving credit facility totaling $2.5 billion, which terminates in 2011. Outstanding borrowings under the credit agreement and commercial paper borrowings, and some outstanding letters of credit, reduce funds available under the credit facility. In addition to the credit facility, we maintain a $50 million money market line, borrowings under which also reduce the funds available under our credit facility. The money market line borrowings allow us to borrow from banks at mutually agreed upon rates, usually at rates below the rates offered under the credit agreement. As of February 3, 2007, we had outstanding borrowings totaling $352 million under our credit agreement and commercial paper program. We had no borrowings under the money market line as of February 3, 2007. The outstanding letters of credit that reduced the funds available under our credit facility totaled $331 million as of February 3, 2007.

      In addition to the available credit mentioned above, as of February 3, 2007, we had available for issuance $1.2 billion of securities under a shelf registration statement filed with the SEC and declared effective on December 9, 2004.

      We also maintain surety bonds related primarily to our self-insured workers compensation claims. These bonds are required by most states in which we are self-insured for workers’ compensation and are placed with third-party insurance providers to insure payment of our obligations in the event we are unable to meet our claim payment obligations up to our self-insured retention levels. These bonds do not represent liabilities of Kroger, as we already have reserves on our books for the claims costs. Market changes may make the surety bonds more costly and, in some instances, availability of these bonds may become more limited, which could affect our costs of, or access to, such bonds. Although we do not believe increased costs or decreased availability would significantly affect our ability to access these surety bonds, if this does become an issue, we would issue letters of credit, in states where allowed, against our credit facility to meet the state bonding requirements. This could increase our cost and decrease the funds available under our credit facility.

      Most of our outstanding public debt is jointly and severally, fully and unconditionally guaranteed by The Kroger Co. and some of our subsidiaries. See Note 17 to the Consolidated Financial Statements for a more detailed discussion of those arrangements. In addition, we have guaranteed half of the indebtedness of three real estate joint ventures in which we are a partner with 50% ownership. Our share of the responsibility for this indebtedness, should the partnerships be unable to meet their obligations, totals approximately $6 million. Based on the covenants underlying this indebtedness as of February 3, 2007, it is unlikely that we will be responsible for repayment of these obligations.

      We also are contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. We could be required to satisfy obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of our assignments among third parties, and various other remedies available to us, we believe the likelihood that we will be required to assume a material amount of these obligations is remote. We have agreed to indemnify certain third-party logistics operators for certain expenses, including pension trust fund withdrawal liabilities.

      In addition to the above, we enter into various indemnification agreements and take on indemnification obligations in the ordinary course of business. Such arrangements include indemnities against third party claims arising out of agreements to provide services to Kroger; indemnities related to the sale of our securities; indemnities of directors, officers and employees in connection with the performance of their work; and indemnities of individuals serving as fiduciaries on benefit plans. While Kroger’s aggregate indemnification obligation could result in a material liability, we are aware of no current matter that we expect to result in a material liability


R ECENTLY A DOPTED A CCOUNTING S TANDARDS

      In December 2004, the FASB issued SFAS No. 123 (Revised 2002), Share-Based Payment (“SFAS No. 123(R)”), which replaced SFAS No. 123, superseded APB No. 25 and related interpretations and amended SFAS No. 95, Statement of Cash Flows . SFAS No 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as compensation cost based on their fair value on the date of grant. We adopted the provisions of SFAS No. 123(R) in the first quarter of 2006. The implementation of SFAS No. 123(R) reduced our net earnings $0.06 per diluted share in 2006. See Note 10 to our Consolidated Financial Statements for further discussion of the effect the adoption of SFAS No. 123(R) had on our Consolidated Financial Statements.

      In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 99, 106, and 123(R). SFAS No. 158 requires an employer that sponsors one or more single-employer defined benefit plans to recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status. In addition, SFAS No. 158 requires an employer to measure a plan’s assets and obligations and determine its funded status as of the end of the employer’s fiscal year and recognize changes in the funded status of a defined benefit postretirement plan in the year the changes occur and that those changes be recorded in comprehensive income, net of tax, as a separate component of shareowners’ equity. SFAS No. 158 also requires additional footnote disclosure. The recognition and disclosure provisions of SFAS No. 158 became effective for us on February 3, 2007. The measurement date provisions of SFAS No. 158 will become effective for our fiscal year beginning February 1, 2009. See Note 14 to our Consolidated Financial Statements for the effects the implementation of SFAS No. 158 had on our Consolidated Financial Statements.

R ECENTLY I SSUED A CCOUNTING S TANDARDS

      In June 2006, the FASB issued Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 becomes effective for our fiscal year beginning February 4, 2007. We are evaluating the effect the implementation of FIN No. 48 will have on our Consolidated Financial Statements.

      In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement . SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurement. SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 will become effective for our fiscal year beginning February 3, 2008. We are evaluating the effect the implementation of SFAS No. 157 will have on our Consolidated Financial Statements.

      In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to make an irrevocable election to measure certain financial instruments and other assets and liabilities at fair value on an instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option has been elected should be recognized into net earnings at each subsequent reporting date. SFAS No. 159 will be become effective for our fiscal year beginning February 3, 2008. We are currently evaluating the effect the adoption of SFAS No. 159 will have on our Consolidated Financial Statements.

      In June 2006, the FASB ratified the consensus of Emerging Issues Task Force (“EITF”) issue No. 06-03, How Taxes Get Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). EITF No. 06-03 indicates that the income statement presentation of taxes within the scope of the Issue on either a gross basis or a net basis is an accounting policy decision that should be disclosed pursuant to Opinion 22. EITF No. 06-03 becomes effective for our fiscal year beginning February 4, 2007. We do not expect the adoption of EITF No. 06-03 to have a material effect on our Consolidated Financial Statements.


O UTLOOK

      This discussion and analysis contains certain forward-looking statements about Kroger’s future performance. These statements are based on management’s assumptions and beliefs in light of the information currently available. Such statements relate to, among other things: projected change in net earnings; identical sales growth; expected pension plan contributions; our ability to generate operating cash flow; projected capital expenditures; square footage growth; opportunities to reduce costs; cash flow requirements; and our operating plan for the future; and are indicated by words such as “comfortable,” “committed,” “will,” “expect,” “goal,” “should,” “intend,” “target,” “believe,” “anticipate,” and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially.

      Statements elsewhere in this report and below regarding our expectations, projections, beliefs, intentions or strategies are forward-looking statements within the meaning of Section 21 E of the Securities Exchange Act of 1934. While we believe that the statements are accurate, uncertainties about the general economy, our labor relations, our ability to execute our plans on a timely basis and other uncertainties described below could cause actual results to differ materially.

  • We expect earnings per share in the range of $1.60-$1.65 for 2007. This represents earnings per share growth of approximately 9%-12% in 2007, net of the effect of a 53 rd week in fiscal 2006 of approximately $0.07 per diluted share.
     
  • We anticipate earnings per share growth rates in the 1 st and 4 th quarters of 2007 will be less than the annual growth rate, and the 2 nd and 3 rd quarter growth rates will be higher than the annual growth rate .
     
  • We expect identical food store sales growth, excluding fuel sales, of 3%-5% in 2007.
     
  • In fiscal 2007, we will continue to focus on driving sales growth and balancing investments in gross margin and improved customer service with operating cost reductions to provide a better shopping experience for our customers. We expect operating margins to improve slightly in 2007.
     
  • We plan to use, over the long-term, one-third of cash flow for debt reduction and two-thirds for stock repurchase and payment of a cash dividend.
     
  • We expect to obtain sales growth from new square footage, as well as from increased productivity from existing locations.
     
  • Capital expenditures reflect our strategy of growth through expansion and acquisition, as well as focusing on productivity increase from our existing store base through remodels. In addition, we will continue our emphasis on self- development and ownership of real estate, logistics and technology improvements. The continued capital spending in technology is focused on improving store operations, logistics, manufacturing procurement, category management, merchandising and buying practices, and should reduce merchandising costs. We intend to continue using cash flow from operations to finance capital expenditure requirements. We expect capital investment for 2007 to be in the range of $1.9-$2.1 billion, excluding acquisitions. Total food store square footage is expected to grow approximately 2% before acquisitions and operational closings.
     
  • Based on current operating trends, we believe that cash flow from operations and other sources of liquidity, including borrowings under our commercial paper program and bank credit facility, will be adequate to meet anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments for the foreseeable future. We also believe we have adequate coverage of our debt covenants to continue to respond effectively to competitive conditions.
     
  • We expect that our OG&A results will be affected by increased costs, such as higher energy costs, pension costs and credit card fees, as well as any future labor disputes, offset by improved productivity from process changes, cost savings negotiated in recently completed labor agreements and leverage gained through sales increases.
     
  • We expect that our effective tax rate for 2007 will be approximately 38%, excluding any effects from the implementation of FIN No. 48.
     
  • We expect rent expense, as a percent of total sales and excluding closed-store activity, will decrease due to the emphasis our current strategy places on ownership of real estate.


  • We believe that in 2007 there will be opportunities to reduce our operating costs in such areas as administration, labor, shrink, warehousing and transportation. These savings will be invested in our core business to drive profitable sales growth and offer improved value and shopping experiences for our customers.
     
  • Although we are not required to make cash contributions during fiscal 2007, we made a $50 million cash contribution to our Company-sponsored pension plans on February 5, 2007. Additional voluntary contributions may be made if our cash flows from operations exceed our expectations. We expect any additional elective contributions made during 2007 will reduce our contributions in future years. Among other things, investment performance of plan assets, the interest rates required to be used to calculate pension obligations and future changes in legislation will determine the amounts of any additional contributions. In addition, we expect to make automatic and matching cash contributions to the 401(k) Retirement Savings Account Plan totaling $75 million in 2007.
     
  • We expect our contributions to multi-employer pension plans to increase at 1.0% over the $204 million we contributed during 2006.

     Various uncertainties and other factors could cause us to fail to achieve our goals. These include:

  • We have various labor agreements expiring in 2007, covering associates in southern California, Cincinnati, Detroit, Houston, Memphis, Toledo, Seattle and West Virginia. We are currently operating under a contract extension in southern California. In all of these contracts, rising health care and pension costs will continue to be an important issue in negotiations. Third parties who operate a distribution facility for us in Louisville, Kentucky, are operating without a labor agreement, and the union representing employees there may call a strike if an agreement is not reached. A prolonged work stoppage affecting a substantial number of locations could have a material effect on our results.
     
  • Our ability to achieve sales and earnings goals may be affected by: labor disputes; industry consolidation; pricing and promotional activities of existing and new competitors, including non-traditional competitors; our response to these actions; the state of the economy, including the inflationary and deflationary trends in certain commodities; stock repurchases; and the success of our future growth plans.
     
  • In addition to the factors identified above, our identical store sales growth could be affected by increases in Kroger private label sales, the effect of our “sister stores” (new stores opened in close proximity to an existing store) and reductions in retail pricing.
     
  • Our operating margins could fail to improve as expected if we are unsuccessful at containing our operating costs.
     
  • We have estimated our exposure to the claims and litigation arising in the normal course of business, as well as in material litigation facing Kroger, and believe we have made adequate provisions for them where it is reasonably possible to estimate and where we believe an adverse outcome is probable. Unexpected outcomes in these matters, however, could result in an adverse effect on our earnings.
     
  • The proportion of cash flow used to reduce outstanding debt, repurchase common stock and pay a cash dividend may be affected by the amount of outstanding debt available for pre-payments, changes in borrowing rates and the market price of Kroger common stock.
     
  • Consolidation in the food industry is likely to continue and the effects on our business, either favorable or unfavorable, cannot be foreseen.
     
  • Rent expense, which includes subtenant rental income, could be adversely affected by the state of the economy, increased store closure activity and future consolidation.
     
  • Depreciation expense, which includes the amortization of assets recorded under capital leases, is computed principally using the straight-line method over the estimated useful lives of individual assets, or the remaining terms of leases. Use of the straight-line method of depreciation creates a risk that future asset write-offs or potential impairment charges related to store closings would be larger than if an accelerated method of depreciation was followed.
     
  • Our effective tax rate may differ from the expected rate due to changes in laws, the status of pending items with various taxing authorities and the deductibility of certain expenses.


  • The amount of our matching cash contributions under our 401(k) Retirement Savings Account Plan will be affected by the actual amounts contributed by participants .
     
  • We believe the multi-employer pension funds to which we contribute are substantially underfunded. Should asset values in these funds deteriorate, or if employers withdraw from these funds without providing for their share of the liability, or should our estimates prove to be understated, our contributions could increase more rapidly than we have anticipated.
     
  • The grocery retail industry continues to experience fierce competition from other traditional food retailers, supercenters, mass merchandisers, club or warehouse stores, drug stores and restaurants. Our continued success is dependent upon our ability to compete in this industry and to reduce operating expenses, including managing health care and pension costs contained in our collective bargaining agreements. The competitive environment may cause us to reduce our prices in order to gain or maintain share of sales, thus reducing margins. While we believe our opportunities for sustained profitable growth are considerable, unanticipated actions of competitors could adversely affect our sales.
     
  • Changes in laws or regulations, including changes in accounting standards, taxation requirements and environmental laws may have a material effect on our financial statements.
     
  • Changes in the general business and economic conditions in our operating regions, including the rate of inflation, population growth and employment and job growth in the markets in which we operate, may affect our ability to hire and train qualified employees to operate our stores. This would negatively affect earnings and sales growth. General economic changes may also affect the shopping habits of our customers, which could affect sales and earnings.
     
  • Changes in our product mix may negatively affect certain financial indicators. For example, we continue to add supermarket fuel centers to our store base. Since gasoline generates low profit margins, including generating decreased margins as the market price increases, we expect to see our FIFO gross profit margins decline as gasoline sales increase. Although this negatively affects our FIFO gross margin, gasoline sales provide a positive effect on operating, general and administrative expenses as a percent of sales.
     
  • Our ability to integrate any companies we acquire or have acquired, and achieve operating improvements at those companies, will affect our operations.
     
  • Our capital expenditures, expected square footage growth, and number of store projects completed during the year could differ from our estimate if we are unsuccessful in acquiring suitable sites for new stores, if development costs vary from those budgeted or if our logistics and technology projects are not completed in the time frame expected or on budget.
     
  • Interest expense could be adversely affected by the interest rate environment, changes in the Company’s credit ratings, fluctuations in the amount of outstanding debt, decisions to incur prepayment penalties on the early redemption of debt and any factor that adversely affects our operations that results in an increase in debt.
     
  • Adverse weather conditions could increase the cost our suppliers charge for their products, or may decrease the customer demand for certain products. Additionally, increases in the cost of inputs, such as utility costs or raw material costs, could negatively affect financial ratios and earnings.
     
  • Although we presently operate only in the United States, civil unrest in foreign countries in which our suppliers do business may affect the prices we are charged for imported goods. If we are unable to pass on these increases to our customers, our FIFO gross margin and net earnings will suffer.

      Other factors and assumptions not identified above could also cause actual results to differ materially from those set forth in the forward-looking information. Accordingly, actual events and results may vary significantly from those included in, contemplated or implied by forward-looking statements made by us or our representatives.


ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

    Financial Risk Management

      We use derivative financial instruments primarily to manage our exposure to fluctuations in interest rates and, to a lesser extent, adverse fluctuations in commodity prices and other market risks. We do not enter into derivative financial instruments for trading purposes. As a matter of policy, all of our derivative positions are intended to reduce risk by hedging an underlying economic exposure. Because of the high correlation between the hedging instrument and the underlying exposure, fluctuations in the value of the instruments generally are offset by reciprocal changes in the value of the underlying exposure. The interest rate derivatives we use are straightforward instruments with liquid markets.

      We manage our exposure to interest rates and changes in the fair value of our debt instruments primarily through the strategic use of variable and fixed rate debt, and interest rate swaps. Our current program relative to interest rate protection contemplates both fixing the rates on variable rate debt and hedging the exposure to changes in the fair value of fixed-rate debt attributable to changes in interest rates. To do this, we use the following guidelines: (i) use average daily bank balance to determine annual debt amounts subject to interest rate exposure, (ii) limit the annual amount of debt subject to interest rate reset and the amount of floating rate debt to a combined total of $2.5 billion or less, (iii) include no leveraged products, and (iv) hedge without regard to profit motive or sensitivity to current mark-to-market status.

      As of February 3, 2007, we maintained six interest rate swap agreements, with notional amounts totaling approximately $1,050 million, to manage our exposure to changes in the fair value of our fixed rate debt resulting from interest rate movements by effectively converting a portion of our debt from fixed to variable rates. These agreements mature at varying times between March 2008 and January 2015. Variable rates for our agreements are based on U.S. dollar London Interbank Offered Rate (“LIBOR”). The differential between fixed and variable rates to be paid or received is accrued as interest rates change in accordance with the agreements and is recognized over the life of the agreements as an adjustment to interest expense. These interest rate swap agreements are being accounted for as fair value hedges. As of February 3, 2007, other long-term liabilities totaling $28 million were recorded to reflect the fair value of these agreements, offset by decreases in the fair value of the underlying debt.

      In addition, as of February 3, 2007, we maintained three forward-starting interest rate swap agreements, with notional amounts totaling $750 million, to manage our exposure to changes in future benchmark interest rates. A forward-starting interest rate swap is an agreement that effectively hedges future benchmark interest rates, including general corporate spreads, on debt for an established period of time. We entered into the forward-starting interest rate swaps in order to lock in fixed interest rates on our forecasted issuances of debt in fiscal 2007 and 2008. Accordingly, these instruments have been designated as cash flow hedges for our forecasted debt issuances. Two of these swaps have ten-year terms, with the remaining swap having a twelve-year term, beginning with the issuance of the debt. The average fixed rate for these instruments is 5.14%, and the variable rate will be determined at the inception date of the swap. As of February 3, 2007, we had recorded an other asset totaling $12 million to reflect the fair value of these agreements.

      During 2003, we terminated six interest rate swap agreements that we accounted for as fair value hedges. We recorded approximately $114 million of proceeds received as a result of these terminations as adjustments to the carrying values of the underlying debt and they are being amortized over the remaining lives of the debt. As of February 3, 2007, the unamortized balances totaled approximately $46 million.

      Annually, we review with the Financial Policy Committee of our Board of Directors compliance with the guidelines. The guidelines may change as our business needs dictate.


      The tables below provide information about our interest rate derivatives and underlying debt portfolio as of February 3, 2007. The amounts shown for each year represent the contractual maturities of long-term debt, excluding capital leases, and the average outstanding notional amounts of interest rate derivatives as of February 3, 2007. Interest rates reflect the weighted average for the outstanding instruments. The variable component of each interest rate derivative and the variable rate debt is based on U.S. dollar LIBOR using the forward yield curve as of February 3, 2007. The Fair-Value column includes the fair-value of our debt instruments and interest rate derivatives as of February 3, 2007. Refer to Notes 5, 6 and 7 to our Consolidated Financial Statements:

Expected Year of Maturity
Fair
    2007     2008     2009     2010     2011     Thereafter     Total     Value
(In millions)
Debt
Fixed rate     $ (526 )   $ (993 )   $ (897 )   $ (35 )   $ (488 )   $ (3,160 )   $ (6,099 ) $ (6,377 )
Average interest rate 7.01 % 6.94 % 6.83 % 7.85 % 6.64 % 6.62 %
Variable rate $ (352 ) $ $ (15 ) $ (7 ) $ (49 ) $ (59 ) $ (482 ) $ (482 )
Average interest rate 5.47 % 3.55 % 3.54 % 3.59 % 3.64 % 4.02 %
 
Average Notional Amounts Outstanding
Fair
2007 2008 2009 2010 2011 Thereafter Total Value
(In millions)
Interest Rate Derivatives
Variable to fixed $ $ $ $ $ $ $ $
Average pay rate
Average receive rate
Fixed to variable $ 1,050 $ 363 $ 300 $ 300 $ 300 $ 300 $ 1,050 $ (28 )
Average pay rate 8.07 % 5.96 % 5.39 % 5.46 % 5.52 % 5.57 %
Average receive rate 6.74 % 5.38 % 4.95 % 4.95 % 4.95 % 4.95 %

    Commodity Price Protection

      We enter into purchase commitments for various resources, including raw materials utilized in our manufacturing facilities and energy to be used in our stores, manufacturing facilities and administrative offices. We enter into commitments expecting to take delivery of and to utilize those resources in the conduct of normal business. Those commitments for which we expect to utilize or take delivery in a reasonable amount of time in the normal course of business qualify as normal purchases and normal sales. For any commitments for which we do not expect to take delivery and, as a result, will require net settlement, the contracts are marked to fair value on a quarterly basis.

      Some of the product we purchase is shipped in corrugated cardboard packaging. We sell corrugated cardboard when it is economical to do so. As of February 3, 2007, we maintained seven derivative instruments to protect us from declining corrugated cardboard prices. These derivatives contain a three-year term. None of the contracts, either individually or in the aggregate, hedge more than 50% of our expected corrugated cardboard sales. The instruments do not qualify for hedge accounting, in accordance with SFAS No. 133, Accounting for Derivative Investments and Hedging Activities , as amended. Accordingly, changes in the fair value of these instruments are marked-to-market in our Consolidated Statements of Operations in OG&A expenses. As of February 3, 2007, an accrued expense totaling $0.2 million had been recorded for the instruments.


ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Report of Independent Registered Public Accounting Firm

To the Shareowners and Board of Directors of
The Kroger Co.:

We have completed integrated audits of The Kroger Co.’s consolidated financial statements and of its internal control over financial reporting as of February 3, 2007, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of The Kroger Co. and its subsidiaries at February 3, 2007 and January 28, 2006, and the results of their operations and their cash flows for each of the three years in the period ended February 3, 2007 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 15 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment , as of January 29, 2006 and the recognition and disclosure provisions of Statement of Financial Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, as of February 3, 2007.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of February 3, 2007 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 3, 2007, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

 
Cincinnati, Ohio
April 4, 2007


THE KROGER CO.
C ONSOLIDATED B ALANCE S HEETS

February 3, January 28,
(In millions - except par value)     2007     2006
ASSETS
Current assets  
          Cash and temporary cash investments $ 189     $ 210
          Deposits in-transit 614 488
          Receivables 773 680
          Receivables - taxes 5 6
          FIFO inventory 5,059 4,886
          LIFO credit (450 ) (400 )
          Prefunded employee benefits 300 300
          Prepaid and other current assets   265     296  
 
                      Total current assets 6,755 6,466
Property, plant and equipment, net 11,779 11,365
Goodwill 2,192 2,192
Other assets     489     459  
 
                      Total Assets $ 21,215   $ 20,482  
 
LIABILITIES
Current liabilities
          Current portion of long-term debt including obligations under capital leases and financing
               obligations $ 906 $ 554
          Accounts payable 3,804 3,546
          Accrued salaries and wages 796 780
          Deferred income taxes 268 217
          Other current liabilities   1,807     1,618  
 
                      Total current liabilities 7,581 6,715
Long-term debt including obligations under capital leases and financing obligations
          Face value long-term debt including obligations under capital leases and financing
               obligations 6,136 6,651
          Adjustment to reflect fair value interest rate hedges   18     27  
 
                      Long-term debt including obligations under capital leases and financing obligations 6,154 6,678
Deferred income taxes 722 843
Other long-term liabilities   1,835     1,856  
 
                      Total Liabilities   16,292     16,092  
 
Commitments and Contingencies (See Note 11)
SHAREOWNERS’ EQUITY
Preferred stock, $100 par, 5 shares authorized and unissued
Common stock, $1 par, 1,000 shares authorized: 937 shares issued in 2006 and 927 shares
      issued in 2005 937 927
Additional paid-in capital 2,755 2,536
Accumulated other comprehensive loss (259 ) (243 )
Accumulated earnings 5,501 4,573
Common stock in treasury, at cost, 232 shares in 2006 and 204 shares in 2005   (4,011 )   (3,403 )
 
                      Total Shareowners’ Equity   4,923     4,390  
 
                      Total Liabilities and Shareowners’ Equity $ 21,215   $ 20,482  

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


THE KROGER CO.
C ONSOLIDATED S TATEMENTS OF O PERATIONS

Years Ended February 3, 2007, January 28, 2006, and January 29, 2005

2006 2005 2004
(In millions, except per share amounts)                 (53 weeks)     (52 weeks)     (52 weeks)
Sales   $ 66,111   $ 60,553   $ 56,434
Merchandise costs, including advertising, warehousing, and transportation,
      excluding items shown separately below 50,115 45,565 42,140
Operating, general and administrative 11,839 11,027 10,611
Rent 649 661 680
Depreciation and amortization 1,272 1,265 1,256
Goodwill impairment charge       904  
 
          Operating Profit 2,236 2,035 843
Interest expense   488   510   557  
 
          Earnings before income tax expense 1,748 1,525 286
Income tax expense   633   567   390  
 
          Net earnings (loss) $ 1,115 $ 958 $ (104 )
 
          Net earnings (loss) per basic common share $ 1.56 $ 1.32 $ (0.14 )
 
          Average number of common shares used in basic calculation 715 724 736
          Net earnings (loss) per diluted common share $ 1.54 $ 1.31 $ (0.14 )
 
          Average number of common shares used in diluted calculation 723 731 736

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



THE KROGER CO.
C ONSOLIDATED S TATEMENTS OF C ASH F LOWS
 
Years Ended February 3, 2007, January 28, 2006 and January 29, 2005              
    2006   2005   2004
(In millions)     (53 weeks)        (52 weeks)        (52 weeks)
Cash Flows From Operating Activities:              
    Net earnings (loss)   $   1,115   $   958   $   (104 )  
          Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:              
                    Depreciation and amortization     1,272     1,265     1,256  
                    LIFO charge     50     27     49  
                    Stock option expense     72     7     13  
                    Expense for Company-sponsored pension plans     161     138     117  
                    Goodwill impairment charge             861  
                    Deferred income taxes     (60 )     (63 )     230  
                    Other     20     39     59  
                    Changes in operating assets and liabilities net of effects from acquisitions of businesses:              
                              Store deposits in-transit     (125 )     18     73  
                              Inventories     (173 )     (157 )     (236 )  
                              Receivables     (90 )     (19 )     13  
                              Prepaid expenses     (43 )     31     (31 )  
                              Accounts payable     256     (80 )     167  
                              Accrued expenses     98     155     (23 )  
                              Income taxes receivable (payable)     (4 )     200     (86 )  
                              Contribution to Company-sponsored pension plans     (150 )     (300 )     (35 )  
                              Other     (48 )     (27 )     7  
 
                    Net cash provided by operating activities     2,351     2,192     2,330  
 
Cash Flows From Investing Activities:              
          Capital expenditures, excluding acquisitions     (1,683 )     (1,306 )     (1,634 )  
          Proceeds from sale of assets     143     69     86  
          Payments for acquisitions, net of cash acquired             (25 )  
          Other     (47 )     (42 )     (35 )  
 
                    Net cash used by investing activities     (1,587 )     (1,279 )     (1,608 )  
 
Cash Flows From Financing Activities:              
          Proceeds from issuance of long-term debt     10     14     616  
          Proceeds from lease-financing transactions     15     76     6  
          Payments on long-term debt     (556 )     (103 )     (701 )  
          Borrowings (payments) on bank revolver     352     (694 )     (309 )  
          Debt prepayment costs             (25 )  
          Proceeds from issuance of capital stock     168     78     25  
          Treasury stock purchases     (633 )     (252 )     (319 )  
          Dividends paid     (140 )          
          Other     (1 )     34     (30 )  
 
                    Net cash used by financing activities     (785 )     (847 )     (737 )  
 
Net increase (decrease) in cash and temporary cash investments     (21 )     66     (15 )  
 
Cash and temporary cash investments:              
          Beginning of year     210     144     159  
          End of year   $   189   $   210   $   144  
 
Reconciliation of capital expenditures              
    Payments for property and equipment   $   (1,683 )   $   (1,306 )   $   (1,634 )  
    Changes in construction-in-progress payables     (94 )          
 
          Total capital expenditures   $   (1,777 )   $   (1,306 )   $   (1,634 )  
 
Disclosure of cash flow information:              
          Cash paid during the year for interest   $   514   $   511   $   590  
          Cash paid during the year for income taxes   $   615   $   431   $   206  

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



THE KROGER CO.
C ONSOLIDATED S TATEMENT OF C HANGES IN S HAREOWNERS’ E QUITY
 
Years Ended February 3, 2007, January 28, 2006 and January 29, 2005                  
                    Accumulated      
          Additional         Other      
    Common Stock   Paid-In   Treasury Stock     Comprehensive     Accumulated  
(In millions)         Shares       Amount       Capital       Shares       Amount       Gain (Loss)       Earnings       Total
Balances at January 31, 2004   913 $ 913 $ 2,382   170   $     (2,827 ) $ (124 ) $ 3,724   $     4,068  
Issuance of common stock:                            
          Stock options and warrants exercised 4   4   25                   29  
          Restricted stock issued 1   1   9                 10  
Treasury stock activity:                          
          Treasury stock purchases, at cost       18     (294 )         (294 )
          Stock options and restricted stock exchanged       2     (28 )         (28 )
Tax benefits from exercise of stock options and warrants     16                 16  
Other comprehensive gain, net of income tax of $47               (78 )     (78 )
Net loss                       (104 )   (104 )
 
Balances at January 29, 2005 918   918   2,432   190     (3,149 )   (202 )   3,620   3,619  
Issuance of common stock:                          
          Stock options and warrants exercised 8   8   57                 65  
          Restricted stock issued 1   1   13                 14  
Treasury stock activity:                          
          Treasury stock purchases, at cost       14     (239 )         (239 )
          Stock options and restricted stock exchanged           (15 )         (15 )
Tax benefits from exercise of stock options and warrants     34                 34  
Other comprehensive loss net of income tax of $26               (41 )     (41 )
Other                   (5 ) (5 )
Net earnings                         958     958  
 
Balances at January 28, 2006 927   927   2,536   204     (3,403 )   (243 )   4,573   4,390  
Issuance of common stock:                          
          Stock options and warrants exercised 9   9   95   (1 )   30           134  
          Restricted stock issued 1   1   13       (5 )         9    
Treasury stock activity:                          
          Treasury stock purchases, at cost       18     (374 )         (374 )
          Stock options and restricted stock exchanged       11     (259 )         (259 )
Tax benefits from exercise of stock options and warrants     39                 39  
Share-based employee compensation     72                 72  
Other comprehensive gain net of income tax of $(63)               102       102  
SFAS No. 158 adjustment net of income tax of $71               (120 )     (120 )
Other               2       2  
Cash dividends declared ($0.26 per common share)                   (187 ) (187 )
Net earnings                         1,115     1,115  
 
Balances at February 3, 2007 937   $ 937   $ 2,755   232   $ (4,011 ) $ (259 ) $ 5,501   $ 4,923  

    2006        2005        2004
Net earnings (loss)   $ 1,115 $   958   $   (104 )  
Reclassification adjustment for losses included in net earnings (loss)          
Unrealized gain (loss) on hedging activities, net of income tax of $(5) in 2006 $(1) in 2005 and $1            
    in 2004   7   1     (1 )  
Additional minimum pension liability adjustment, net of income tax of $(58) in 2006, $26 in 2005            
    and $46 in 2004     95     (42 )      (77 )  
 
Comprehensive income (loss)   $ 1,217   $   917   $   (182 )  

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


N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS

All dollar amounts are in millions except share and per share amounts.
Certain prior-year amounts have been reclassified to conform to current year presentation.

1. A CCOUNTING P OLICIES

      The following is a summary of the significant accounting policies followed in preparing these financial statements.

    Description of Business, Basis of Presentation and Principles of Consolidation

      The Kroger Co. (the “Company”) was founded in 1883 and incorporated in 1902. As of February 3, 2007, the Company was one of the largest retailers in the United States based on annual sales. The Company also manufactures and processes food for sale by its supermarkets. The accompanying financial statements include the consolidated accounts of the Company and its subsidiaries. Significant intercompany transactions and balances have been eliminated.

    Fiscal Year

      The Company’s fiscal year ends on the Saturday nearest January 31. The last three fiscal years consist of the 53-week period ended February 3, 2007, the 52-week period ended January 28, 2006, and the 52-week period ended January 29, 2005.

    Pervasiveness of Estimates

      The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of consolidated revenues and expenses during the reporting period also is required. Actual results could differ from those estimates.

    Inventories

      Inventories are stated at the lower of cost (principally on a last-in, first-out “LIFO” basis) or market. In total, approximately 98% of inventories for 2006 and 2005 were valued using the LIFO method. Cost for the balance of the inventories, including substantially all fuel inventories, was determined using the first-in, first-out (“FIFO”) method. Replacement cost was higher than the carrying amount by $450 at February 3, 2007 and $400 at January 28, 2006. The Company follows the Link-Chain, Dollar-Value LIFO method for purposes of calculating its LIFO charge or credit.

      The item-cost method of accounting to determine inventory cost before the LIFO adjustment is followed for substantially all store inventories at the Company’s supermarket divisions. This method involves counting each item in inventory, assigning costs to each of these items based on the actual purchase costs (net of vendor allowances and cash discounts) of each item and recording the actual cost of items sold. The item-cost method of accounting allows for more accurate reporting of periodic inventory balances and enables management to more precisely manage inventory when compared to the retail method of accounting.

      The Company evaluates inventory shortages throughout the year based on actual physical counts in its facilities. Allowances for inventory shortages are recorded based on the results of these counts to provide for estimated shortages as of the financial statement date.

    Property, Plant and Equipment

      Generally, property, plant and equipment are recorded at cost. Depreciation expense, which includes the amortization of assets recorded under capital leases, is computed principally using the straight-line method over the estimated useful lives of individual assets. Leasehold improvements are depreciated over the shorter of the remaining life of the lease term or the useful life of the asset. Buildings and land improvements are depreciated based on lives varying from 10 to 40 years. Some store equipment acquired as a result of the Fred Meyer merger was assigned a 15-year life. The life of this equipment was not changed. All new purchases of store equipment are assigned lives varying from three to nine years. Leasehold improvements are amortized over the shorter of the lease term to which they relate, which varies from four to 25 years, or the useful life of the asset. Manufacturing plant and distribution center equipment is depreciated over lives varying from three to 15 years. Information technology assets are generally depreciated over five years. Depreciation and amortization expense was $1,272 in 2006, $1,265 in 2005 and $1,256 in 2004.


      Interest costs on significant projects constructed for the Company’s own use are capitalized as part of the costs of the newly constructed facilities. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss is reflected in net earnings.

    Deferred Rent

      The Company recognizes rent holidays, including the time period during which the Company has access to the property for construction of buildings or improvements, as well as construction allowances and escalating rent provisions on a straight-line basis over the term of the lease. The deferred amount is included in Other Current Liabilities and Other Long-Term Liabilities on the Company’s Consolidated Balance Sheets.

    Goodwill

      The Company reviews goodwill for impairment during the fourth quarter of each year, and also upon the occurrence of trigger events. The reviews are performed at the operating division level. Generally, fair value represents a multiple of earnings, or discounted projected future cash flows, and is compared to the carrying value of a division for purposes of identifying potential impairment. Projected future cash flows are based on management’s knowledge of the current operating environment and expectations for the future. If potential for impairment is identified, the fair value of a division is measured against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the division’s goodwill. Goodwill impairment is recognized for any excess of the carrying value of the division’s goodwill over the implied fair value. Results of the goodwill impairment reviews performed during 2006, 2005 and 2004 are summarized in Note 2 to the Consolidated Financial Statements.

    Intangible Assets

      In addition to goodwill, the Company has recorded intangible assets totaling $26, $22 and $28 for leasehold equities, liquor licenses and pharmacy prescription file purchases, respectively at February 3, 2007. Balances at January 28, 2006 were $35, $20 and $30 for leasehold equities, liquor licenses and pharmacy prescription files, respectively. Leasehold equities are amortized over the remaining life of the lease. Owned liquor licenses are not amortized, while liquor licenses that must be renewed are amortized over their useful lives. Pharmacy prescription file purchases are amortized over seven years. These assets are considered annually during the Company’s testing for impairment.

    Impairment of Long-Lived Assets

      In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets , the Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether certain trigger events have occurred. These events include current period losses combined with a history of losses or a projection of continuing losses or a significant decrease in the market value of an asset. When a trigger event occurs, an impairment calculation is performed, comparing projected undiscounted future cash flows, utilizing current cash flow information and expected growth rates related to specific stores, to the carrying value for those stores. If impairment is identified for long-lived assets to be held and used, discounted future cash flows are compared to the asset’s current carrying value. Impairment is recorded when the carrying value exceeds the discounted cash flows. With respect to owned property and equipment held for sale, the value of the property and equipment is adjusted to reflect recoverable values based on previous efforts to dispose of similar assets and current economic conditions. Impairment is recognized for the excess of the carrying value over the estimated fair market value, reduced by estimated direct costs of disposal. The Company recorded asset impairments in the normal course of business totaling $61, $48 and $24 in 2006, 2005 and 2004. Costs to reduce the carrying value of long-lived assets for each of the years presented have been included in the Consolidated Statements of Operations as “Operating, general and administrative” expense.


    Store Closing Costs

      All closed store liabilities related to exit or disposal activities initiated after December 31, 2002, are accounted for in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities . The Company provides for closed store liabilities relating to the present value of the estimated remaining noncancellable lease payments after the closing date, net of estimated subtenant income. The Company estimates the net lease liabilities using a discount rate to calculate the present value of the remaining net rent payments on closed stores. The closed store lease liabilities usually are paid over the lease terms associated with the closed stores, which generally have remaining terms ranging from one to 20 years. Adjustments to closed store liabilities primarily relate to changes in subtenant income and actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the change becomes known. Store closing liabilities are reviewed quarterly to ensure that any accrued amount that is not a sufficient estimate of future costs, or that no longer is needed for its originally intended purpose, is adjusted to income in the proper period.

      Owned stores held for disposal are reduced to their estimated net realizable value. Costs to reduce the carrying values of property, equipment and leasehold improvements are accounted for in accordance with our policy on impairment of long-lived assets. Inventory write-downs, if any, in connection with store closings, are classified in “Merchandise costs.” Costs to transfer inventory and equipment from closed stores are expensed as incurred.

      The following table summarizes accrual activity for future lease obligations of stores closed that were closed in the normal course of business, not part of a coordinated closing.

    Future Lease
    Obligations
Balance at January 29, 2005   $   65  
Additions     10  
Payments     (8 )  
Adjustments      (2 )  
 
Balance at January 28, 2006     65  
Additions     9  
Payments     (14 )  
Adjustments      (27 )  
 
Balance at February 3, 2007   $   33  

      In addition, as of February 3, 2007, the Company maintained a $48 liability for facility closure costs, representing the present value of lease obligations remaining through 2019 for locations closed in California prior to the Fred Meyer merger in 1999, and an $8 liability for store closing costs related to two distinct, formalized plans that coordinated the closing of several locations over relatively short periods of time in 2000 and 2001.

    Interest Rate Risk Management

      The Company uses derivative instruments primarily to manage its exposure to changes in interest rates. The Company’s current program relative to interest rate protection and the methods by which the Company accounts for its derivative instruments are described in Note 6.

    Commodity Price Protection

      The Company enters into purchase commitments for various resources, including raw materials utilized in its manufacturing facilities and energy to be used in its stores, manufacturing facilities and administrative offices. The Company enters into commitments expecting to take delivery of and to utilize those resources in the conduct of the normal course of business. The Company’s current program relative to commodity price protection and the methods by which the Company accounts for its purchase commitments are described in Note 6.


    Benefit Plans

      Effective February 3, 2007, the Company adopted the provisions of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 99, 106 and 123(R) , which required the recognition of the funded status of its retirement plans on the Consolidated Balance Sheet. Actuarial gains or losses, prior service costs or credits and transition obligations that have not yet been recognized are now required to be recorded as a component of Accumulated Other Comprehensive Income (“AOCI”).

      The determination of the obligation and expense for Company-sponsored pension plans and other post-retirement benefits is dependent on the selection of assumptions used by actuaries and the Company in calculating those amounts. Those assumptions are described in Note 14 and include, among others, the discount rate, the expected long-term rate of return on plan assets and the rates of increase in compensation and health care costs. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect the recognized expense and recorded obligation in future periods. While the Company believes that the assumptions are appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the pension and other post-retirement obligations and future expense.

      The Company also participates in various multi-employer plans for substantially all union employees. Pension expense for these plans is recognized as contributions are funded. Refer to Note 14 for additional information regarding the Company’s benefit plans.

    Stock Option Plans

      Effective January 29, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment, using the modified prospective transition method and, therefore, has not restated results for prior periods. Under this method, the Company recognizes compensation expense for all share-based payments granted after January 29, 2006, as well as all share-based payments granted prior to, but not yet vested as of, January 29, 2006, in accordance with SFAS No. 123(R). Under the fair value recognition provisions of SFAS No. 123(R), the Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award. Prior to the adoption of SFAS No. 123(R), the Company accounted for share-based payments under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (“APB No. 25”) and the disclosure provisions of SFAS No. 123. The Company also elected the alternative transition method for calculating windfall tax benefits available as of the adoption of SFAS No. 123(R). For further information regarding the adoption of SFAS No. 123(R), see Note 10 to the Consolidated Financial Statements.

    Deferred Income Taxes

      Deferred income taxes are recorded to reflect the tax consequences of differences between the tax basis of assets and liabilities and their financial reporting basis. Refer to Note 4 for the types of differences that give rise to significant portions of deferred income tax assets and liabilities. Deferred income taxes are classified as a net current or noncurrent asset or liability based on the classification of the related asset or liability for financial reporting purposes. A deferred tax asset or liability that is not related to an asset or liability for financial reporting is classified according to the expected reversal date.

    Tax Contingencies

      Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. As of February 3, 2007, tax years 2002 through 2004 were undergoing examination by the Internal Revenue Service.

      The establishment of the Company’s tax contingency allowances relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.


    Self-Insurance Costs

      The Company primarily is self-insured for costs related to workers’ compensation and general liability claims. Liabilities are actuarially determined and are recognized based on claims filed and an estimate of claims incurred but not reported. The liabilities for workers’ compensation claims are accounted for on a present value basis. The Company has purchased stop-loss coverage to limit its exposure to any significant exposure on a per claim basis. The Company is insured for covered costs in excess of these per claim limits.

    Revenue Recognition

      Revenues from the sale of products are recognized at the point of sale of the Company’s products. Discounts provided to customers by the Company at the time of sale, including those provided in connection with loyalty cards, are recognized as a reduction in sales as the products are sold. Discounts provided by vendors, usually in the form of paper coupons, are not recognized as a reduction in sales provided the coupons are redeemable at any retailer that accepts coupons. Pharmacy sales are recorded when picked up by the customer. Sales taxes are not recorded as a component of sales. The Company does not recognize a sale when it sells gift cards and gift certificates. Rather, a sale is recognized when the gift card or gift certificate is redeemed to purchase the Company’s products.

    Merchandise Costs

      In addition to product costs, net of discounts and allowances; advertising costs (see separate discussion below); inbound freight charges; warehousing costs, including receiving and inspection costs; transportation costs; and manufacturing production and operational costs are included in the “Merchandise costs” line item of the Consolidated Statements of Operations. Warehousing, transportation and manufacturing management salaries are also included in the “Merchandise costs” line item; however, purchasing management salaries and administration costs are included in the “Operating, general, and administrative” line item along with most of the Company’s other managerial and administrative costs. Rent expense and depreciation expense are shown separately in the Consolidated Statements of Operations.

      Warehousing and transportation costs include distribution center direct wages, repairs and maintenance, utilities, inbound freight and, where applicable, third party warehouse management fees, as well as transportation direct wages and repairs and maintenance. These costs are recognized in the periods the related expenses are incurred.

      The Company believes the classification of costs included in merchandise costs could vary widely throughout the industry. The Company’s approach is to include in the “Merchandise costs” line item the direct, net costs of acquiring products and making them available to customers in its stores. The Company believes this approach most accurately presents the actual costs of products sold.

      The Company recognizes all vendor allowances as a reduction in merchandise costs when the related product is sold. When possible, vendor allowances are applied to the related product by item and, therefore, reduce the carrying value of inventory by item. When the items are sold, the vendor allowance is recognized. When it is not possible, due to systems constraints, to allocate vendor allowances to the product by item, vendor allowances are recognized as a reduction in merchandise costs based on inventory turns and, therefore, recognized as the product is sold.

    Advertising Costs

      The Company’s advertising costs are recognized in the periods the related expenses are incurred and are included in the “Merchandise costs” line item of the Consolidated Statements of Operations. The Company’s pre-tax advertising costs totaled $508 in 2006, $498 in 2005 and $528 in 2004. The Company does not record vendor allowances for co-operative advertising as a reduction of advertising expense.

    Deposits In-Transit

      Deposits in-transit generally represent funds deposited to the Company’s bank accounts at the end of the quarter related to sales, a majority of which were paid for with credit cards and checks, to which the Company does not have immediate access.


    Consolidated Statements of Cash Flows

      For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be temporary cash investments. Book overdrafts, which are included in accounts payable, represent disbursements that are funded as the item is presented for payment. Book overdrafts totaled $600, $596 and $562 as of February 3, 2007, January 28, 2006, and January 29, 2005, respectively, and are reflected as a financing activity in the Consolidated Statements of Cash Flows.

    Segments

      The Company operates retail food and drug stores, multi-department stores, jewelry stores, and convenience stores throughout the United States. The Company’s retail operations, which represent substantially all of the Company’s consolidated sales, are its only reportable segment. All of the Company’s operations are domestic.

2. G OODWILL

      The annual evaluation of goodwill performed during the fourth quarter of 2006 and 2005 did not result in impairment.

      The annual evaluation of goodwill performed during the fourth quarter of 2004 resulted in a $904 pre-tax, non-cash impairment charge related to goodwill at the Company’s Ralphs and Food 4 Less divisions. The divisions’ operating performance suffered due to the intense competitive environment during the 2003 southern California labor dispute and recovery period after the labor dispute. The decreased operating performance was the result of the investments in personnel, training and price reductions necessary to help regain Ralphs’ business lost during the labor dispute. As a result of this decline and the decline in future expected operating performance, the divisions’ carrying value of goodwill exceeded its implied fair value resulting in the impairment charge. Most of the impairment charge was non-deductible for income tax purposes. At February 3, 2007 and January 28, 2006, the Company maintained $1,458 of goodwill for the Ralphs and Food 4 Less divisions.

      The following table summarizes the changes in the Company’s net goodwill balance through February 3, 2007.

    Goodwill
Balance at January 31, 2004   $   3,138  
Goodwill impairment charge     (904 )  
Goodwill recorded     6  
Purchase accounting adjustments     (49 )  
 
Balance at January 29, 2005     2,191  
Goodwill impairment charge      
Goodwill recorded      
Purchase accounting adjustments     1  
 
Balance at January 28, 2006     2,192  
Goodwill impairment charge      
Goodwill recorded      
Purchase accounting adjustments      
 
Balance at February 3, 2007   $   2,192  


3. P ROPERTY , P LANT AND E QUIPMENT , N ET

Property, plant and equipment, net consists of:

    2006        2005
Land   $   1,690   $   1,675  
Buildings and land improvements     5,402     5,142  
Equipment     8,255     7,980  
Leasehold improvements     4,221     3,917  
Construction-in-progress     822     511  
Leased property under capital leases and financing obligations     592     561  
 
    Total property, plant and equipment     20,982     19,786  
Accumulated depreciation and amortization     (9,203 )     (8,421 )  
 
    Property, plant and equipment, net   $   11,779   $   11,365  

      Accumulated depreciation for leased property under capital leases was $288 at February 3, 2007, and $263 at January 28, 2006.

      Approximately $566 and $798, original cost, of Property, Plant and Equipment collateralized certain mortgages at February 3, 2007, and January 28, 2006, respectively.

4. T AXES B ASED ON I NCOME

      The provision for taxes based on income consists of:

    2006        2005        2004
    Federal              
              Current   $ 652     $ 609   $ 96  
              Deferred     (52 )   (79 )   258  
 
    600     530     354  
    State and local              
              Current     55     42     25  
              Deferred     (22 )   (5 )   11  
 
    33     37     36  
 
    Total   $ 633   $ 567   $ 390  
 
A reconciliation of the statutory federal rate and the effective rate follows:              
 
    2006        2005        2004
  Statutory rate     35.0 %   35.0 %   35.0 %
  State income taxes, net of federal tax benefit     1.9 %   1.6 %   2.6 %
  Non-deductible goodwill             101.7 %
  Deferred tax adjustment     (1.2 )%        
  Other changes, net     0.5 %   0.6 %   (2.9 )%
 
    36.2 %   37.2 %   136.4 %  

      During the reconciliation of the Company’s deferred tax balances, after the filing of annual federal and state tax returns, the Company identified adjustments to be made in the prior years’ deferred tax reconciliation. These deferred tax balances were corrected in the Company’s Consolidated Financial Statements for the year ended February 3, 2007, which resulted in a reduction of the Company’s 2006 provision for income tax expense of approximately $21. The Company does not believe these adjustments are material to its Consolidated Financial Statements for the year ended February 3, 2007, or to any prior years’ Consolidated Financial Statements. As a result, the Company has not restated any prior year amounts.


The tax effects of significant temporary differences that comprise tax balances were as follows:

    2006        2005
Current deferred tax assets:        
          Net operating loss carryforwards   $ 17   $   18  
          Compensation related costs   32      
          Other   4     42  
 
                      Total current deferred tax assets   53     60  
Current deferred tax liabilities:        
          Compensation related costs       (2 )
          Insurance related costs     (109 )     (107 )
          Inventory related costs     (212 )     (168 )
 
                      Total current deferred tax liabilities     (321 )     (277 )
 
Current deferred taxes   $ (268 )   $   (217 )
 
Long-term deferred tax assets:        
          Compensation related costs   $ 332   $   290  
          Insurance related costs       9  
          Lease accounting   122     106  
          Closed store reserves   96     95  
          Net operating loss carryforwards   29     26  
          Other     47     21  
 
                      Long-term deferred tax assets, net   626     547  
Long-term deferred tax liabilities:        
          Depreciation   (1,114 )     (1,193 )
          Insurance related costs   (33 )      
          Deferred income   (201 )     (197 )
 
                      Total long-term deferred tax liabilities     (1,348 )     (1,390 )
 
Long-term deferred taxes   $ (722 )   $   (843 )

      At February 3, 2007, the Company had net operating loss carryforwards for federal income tax purposes of $74 that expire from 2010 through 2018. In addition, the Company had net operating loss carryforwards for state income tax purposes of $733 that expire from 2010 through 2025. The utilization of certain of the Company’s net operating loss carryforwards may be limited in a given year.

      At February 3, 2007, the Company had state credits of $23 that expire from 2007 through 2020. The utilization of certain of the Company’s credits may be limited in a given year.

      The amounts of cash paid for income taxes in 2004 was reduced by approximately $90 as a result of federal bonus depreciation. This benefit began reversing in 2005 and increased the amount of cash paid for income taxes by approximately $71 in 2006 and $108 in 2005, respectively.


5. D EBT O BLIGATIONS

      Long-term debt consists of:

    2006        2005
Credit facility   $   352   $    
4.95% to 9.20% Senior notes and debentures due through 2031     5,916     6,390  
5.00% to 9.95% mortgages due in varying amounts through 2034     169     179  
Other     144     178  
 
Total debt     6,581     6,747  
Less current portion     (878 )     (527 )  
 
Total long-term debt   $   5,703   $   6,220  

      As of February 3, 2007, the Company had a $2,500 Five-Year Credit Agreement maturing in 2011, unless earlier terminated by the Company. Borrowings under the credit agreement bear interest at the option of the Company at a rate equal to either (i) the highest, from time to time of (A) the base rate of JP Morgan Chase Bank, N.A., (B) ½% over a moving average of secondary market morning offering rates for three-month certificates of deposit adjusted for reserve requirements, and (C) ½% over the federal funds rate or (ii) an adjusted Eurodollar rate based upon the London Interbank Offered Rate (“Eurodollar Rate”) plus an Applicable Margin. In addition, the Company pays a Facility Fee in connection with the credit agreement. Both the Applicable Margin and the Facility Fee vary based upon the Company’s achievement of a financial ratio or credit rating. At February 3, 2007, the Applicable Margin was 0.27% and the Facility Fee was 0.08%. The credit facility contains covenants, which, among other things, require the maintenance of certain financial ratios, including fixed charge coverage and leverage ratios. The Company may prepay the credit agreement in whole or in parts, at any time, without a prepayment penalty. As of February 3, 2007, the Company had $352 outstanding under the credit agreement. The weighted average interest rate on the amounts outstanding under the credit agreement was 5.47% at February 3, 2007.

      At February 3, 2007, the Company had borrowings totaling $352 under its P2/F2/A3 rated commercial paper program. Any borrowings under this program are backed by the Company’s credit facility and reduce the amount available under the credit facility.

      At February 3, 2007, the Company also maintained a $50 money market line. In addition to credit agreement borrowings, borrowings under the money market line and some outstanding letters of credit reduce funds available under the Company’s credit agreement. At February 3, 2007, these letters of credit totaled $331. The Company had no borrowings under the money market line at February 3, 2007.

      Most of the Company’s outstanding public debt is subject to early redemption at varying times and premiums, at the option of the Company. In addition, subject to certain conditions, some of the Company’s publicly issued debt will be subject to redemption, in whole or in part, at the option of the holder upon the occurrence of a redemption event, upon not less than five days’ notice prior to the date of redemption, at a redemption price equal to the default amount, plus a specified premium. “Redemption Event” is defined in the indentures as the occurrence of (i) any person or group, together with any affiliate thereof, beneficially owning 50% or more of the voting power of the Company or (ii) any one person or group, or affiliate thereof, succeeding in having a majority of its nominees elected to the Company’s Board of Directors, in each case, without the consent of a majority of the continuing directors of the Company.


      The aggregate annual maturities and scheduled payments of long-term debt, as of year-end 2006, and for the years subsequent to 2006 are:

2007   $ 878
2008     993
2009     912  
2010     42
2011     537
Thereafter     3,219  
 
Total debt   $ 6,581  

6. F INANCIAL I NSTRUMENTS

    Interest Rate Risk Management

      The Company historically has used derivatives to manage its exposure to changes in interest rates. The interest differential to be paid or received is accrued as interest expense. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , as amended, defines derivatives, requires that derivatives be carried at fair value on the balance sheet and provides for hedge accounting when certain conditions are met. In accordance with this standard, the Company’s derivative financial instruments are recognized on the balance sheet at fair value. Changes in the fair value of derivative instruments designated as “cash flow” hedges, to the extent the hedges are highly effective, are recorded in other comprehensive income, net of tax effects. Ineffective portions of cash flow hedges, if any, are recognized in current period earnings. Other comprehensive income or loss is reclassified into current period earnings when the hedged transaction affects earnings. Changes in the fair value of derivative instruments designated as “fair value” hedges, along with corresponding changes in the fair values of the hedged assets or liabilities, are recorded in current period earnings.

      The Company assesses, both at the inception of the hedge and on an ongoing basis, whether derivatives used as hedging instruments are highly effective in offsetting the changes in the fair value or cash flow of the hedged items. If it is determined that a derivative is not highly effective as a hedge or ceases to be highly effective, the Company discontinues hedge accounting prospectively.

      The Company’s current program relative to interest rate protection contemplates both fixing the rates on variable rate debt and hedging the exposure to changes in the fair value of fixed-rate debt attributable to changes in interest rates. To do this, the Company uses the following guidelines: (i) use average daily bank balance to determine annual debt amounts subject to interest rate exposure, (ii) limit the annual amount subject to interest rate reset and the amount of floating rate debt to a combined total of $2.5 billion or less, (iii) include no leverage products, and (iv) hedge without regard to profit motive or sensitivity to current mark-to-market status.

      Annually, the Company reviews with the Financial Policy Committee of the Board of Directors compliance with the guidelines. These guidelines may change as the Company’s needs dictate.

      The table below summarizes the outstanding interest rate swaps designated as hedges as of February 3, 2007, and January 28, 2006. The variable component of each interest rate swap outstanding at February 3, 2007, was based on LIBOR as of February 3, 2007. The variable component of each interest rate swap outstanding at January 28, 2006, was based on LIBOR as of January 28, 2006.

    2006   2005
    Pay   Pay   Pay   Pay
    Floating        Fixed        Floating        Fixed
Notional amount   $   1,050     $    —   $   1,375     $          
Duration in years               3.08             3.28            
Average variable rate   8.07 %     8.14 %        
Average fixed rate   6.74 %     6.98 %        

      In addition to the interest rate swaps noted above, in 2005 the Company entered into three forward-starting interest rate swap agreements with a notional amount totaling $750 million. A forward-starting interest rate swap is an agreement that effectively hedges future benchmark interest rates, including general corporate spreads, on debt for an established period of time. The Company entered into the forward-starting interest rate swaps in order to lock in fixed interest rates on its forecasted issuances of debt in fiscal 2007 and 2008. Accordingly, these instruments have been designated as cash flow hedges for the Company’s forecasted debt issuances. Two of the swaps have ten-year terms, with the remaining swap having a twelve-year term, beginning with the issuance of the debt. The average fixed rate for these instruments is 5.14%.


    Commodity Price Protection

      The Company enters into purchase commitments for various resources, including raw materials utilized in its manufacturing facilities and energy to be used in its stores, manufacturing facilities and administrative offices. The Company enters into commitments expecting to take delivery of and to utilize those resources in the conduct of normal business. Those commitments for which the Company expects to utilize or take delivery in a reasonable amount of time in the normal course of business qualify as normal purchases and normal sales. Any commitments for which the Company does not expect to take delivery, and, as a result will require net settlement, are marked to fair value on a quarterly basis.

      Some of the product the Company purchases is shipped in corrugated cardboard packaging. The corrugated cardboard is sold when it is economical to do so. As of February 3, 2007, the Company maintained seven derivative instruments to protect it from declining corrugated cardboard prices. These derivatives contain a three-year term. None of the contracts, either individually or in the aggregate, hedge more than 50% of the Company’s expected corrugated cardboard sales. The instruments do not qualify for hedge accounting, in accordance with SFAS No. 133, Accounting for Derivative Investments and Hedging Activities, as amended. Accordingly, changes in the fair value of these instruments are marked-to-market in the Company’s Consolidated Statements of Operations as operating, general and administrative (“OG&A”) expenses. As of February 3, 2007, an accrued liability totaling $0.2 had been recorded to reflect the fair value of these instruments.

7. F AIR V ALUE OF F INANCIAL I NSTRUMENTS

      The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it was practicable to estimate that value:

    Cash and Temporary Cash Investments, Store Deposits In-Transit, Receivables, Prepaid and Other Current Assets, Accounts Payable, Accrued Salaries and Wages and Other Current Liabilities

      The carrying amounts of these items approximated fair value.

    Long-term Investments

      The fair values of these investments were estimated based on quoted market prices for those or similar investments.

    Long-term Debt

      The fair value of the Company’s long-term debt, including the current portion thereof and excluding borrowings under the credit facility, was estimated based on the quoted market price for the same or similar issues. If quoted market prices were not available, the fair value was based upon the net present value of the future cash flows using the forward interest rate yield curve in effect at the respective year-ends. The carrying values of long-term debt outstanding under the Company’s credit facility approximated fair value.

    Interest Rate Protection Agreements

      The fair value of these agreements was based on the net present value of the future cash flows using the forward interest rate yield curve in effect at the respective year-ends.


      The estimated fair values of the Company’s financial instruments are as follows:

2006 2005
Carrying Estimated Carrying Estimated
    Value     Fair Value     Value     Fair Value
Cash and temporary cash investments   $ 189 $ 189 $ 210 $ 210  
Store deposits in-transit $ 614     $ 614     $ 488     $ 488
Long-term investments for which it is
          Practicable $ 152 $ 152 $ 118 $ 118
          Not Practicable $ $ $ 1 $
Debt for which it is (1)
          Practicable $ (6,581 ) $ (6,859 ) $ (6,747 ) $ (7,038 )
          Not Practicable $ $ $ $
Interest Rate Protection Agreements
          Receive fixed swaps asset/(liability) (2) $ (28 ) $ (28 ) $ (34 ) $ (34 )
          Forward-starting swap asset/(liability) (3) $ 12 $ 12 $ (2 ) $ (2 )
Corrugated Cardboard Price Protection Agreements (4) $ $ $ 3 $ 3

      (1)     Excludes capital lease and lease-financing obligations.
 
(2) As of February 3, 2007, the Company maintained six interest rate swap agreements, with notional amounts totaling $1,050, to manage its exposure to changes in the fair value of its fixed rate debt resulting from interest rate movements by effectively converting a portion of the Company’s debt from fixed to variable rates. These agreements mature at varying times between March 2008 and January 2015. Variable rates for these agreements are based on U.S. dollar London Interbank Offered Rate (“LIBOR”). The differential between fixed and variable rates to be paid or received is accrued as interest rates change in accordance with the agreements and is recognized over the life of the agreements as an adjustment to interest expense. These interest rate swap agreements are being accounted for as fair value hedges. As of February 3, 2007, other long-term liabilities totaling $28 were recorded to reflect the fair value of these agreements, offset by decreases in the fair value of the underlying debt.
 
(3) As of February 3, 2007, the Company maintained three forward-starting interest rate swap agreements, with notional amounts totaling $750, to manage its exposure to changes in future benchmark interest rates. A forward-starting interest rate swap is an agreement that effectively hedges future benchmark interest rates, including general corporate spreads, on debt for an established period of time. The Company entered into the forward-starting interest rate swaps in order to lock in fixed interest rates on the Company’s forecasted issuance of debt in fiscal 2007 and 2008. As of February 3, 2007, other long-term assets totaling $12 were recorded to reflect the fair value of these agreements.
 
(4) See Note 6 for a description of the corrugated cardboard price protection agreements.

8. L EASES AND L EASE -F INANCED T RANSACTIONS

      The Company operates primarily in leased facilities. Lease terms generally range from 10 to 20 years with options to renew for varying terms. Terms of certain leases include escalation clauses, percentage rent based on sales or payment of executory costs such as property taxes, utilities or insurance and maintenance. Rent expense for leases with escalation clauses, capital improvement funding or other lease concessions is accounted for on a straight-line basis beginning with the earlier of the lease commencement date or the date the Company takes possession. Portions of certain properties are subleased to others for periods generally ranging from one to 20 years.

      Rent expense (under operating leases) consists of:

    2006     2005     2004
Minimum rentals   $ 753     $ 760     $ 772  
Contingent payments 10 8 9
Sublease income   (114 )   (107 )   (101 )
 
      Total rent expense $ 649   $ 661   $ 680  


      Minimum annual rentals and payments under capital leases and lease-financed transactions for the five years subsequent to 2006 and in the aggregate are:

Lease-
Capital Operating Financed
Leases Leases Transactions
2007 $ 57 $ 778   $ 3
2008   54 734 3
2009 52   690 4
2010 51   642 4
2011   49 587 4
Thereafter   294     4,118   93
 
557 $ 7,549 $ 111
 
Less estimated executory costs included in capital leases   (3 )
 
Net minimum lease payments under capital leases 554
Less amount representing interest   (237 )
 
Present value of net minimum lease payments under capital leases $ 317    

      Total future minimum rentals under noncancellable subleases at February 3, 2007, were $444.

9. E ARNINGS PER C OMMON S HARE (“EPS”)

      Basic earnings (loss) per common share equals net earnings (loss) divided by the weighted average number of common shares outstanding. Diluted earnings per common share equals net earnings (loss) divided by the weighted average number of common shares outstanding after giving effect to dilutive stock options and warrants.

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

For the year ended   For the year ended For the year ended
February 3, 2007   January 28, 2006 January 29, 2005
Earnings Shares Per Earnings Shares Per Loss Shares Per
(Numer- (Denomi- Share (Numer- (Denomi- Share (Numer- (Denomi- Share
(in millions, except per share amounts)     ator)     nator)     Amount     ator)     nator)     Amount     ator)     nator)     Amount
Basic EPS   $ 1,115   715   $ 1.56   $ 958   724   $ 1.32   $ (104) 736 $ (0.14 )
Dilutive effect of stock option
    awards and warrants 8 7
 
Diluted EPS $ 1,115 723 $ 1.54 $ 958 731 $ 1.31 $ (104) 736 $ (0.14 )

      For the years ended February 3, 2007, January 28, 2006 and January 29, 2005, there were options outstanding for approximately 25.4 million, 24.6 million and 61.5 million shares of common stock, respectively, that were excluded from the computation of diluted EPS. These shares were excluded because their inclusion would have had an anti-dilutive effect on EPS.


10. S TOCK O PTION P LANS

      Prior to January 29, 2006, the Company applied APB No. 25, and related interpretations, in accounting for its stock option plans and provided the pro-forma disclosures required by SFAS No. 123. APB No. 25 provided for recognition of compensation expense for employee stock awards based on the intrinsic value of the award on the grant date.

      The Company grants options for common stock (“stock options”) to employees, as well as to its non-employee directors, under various plans at an option price equal to the fair market value of the stock at the date of grant. Although equity awards may be made throughout the year, it has been the Company’s practice typically to make an annual grant in conjunction with the May meeting of its Board of Directors.

      Stock options typically expire 10 years from the date of grant. Stock options vest between one and five years from the date of grant or, for certain stock options, the earlier of the Company’s stock reaching certain pre-determined and appreciated market prices or nine years and six months from the date of grant. Under APB No. 25, the Company did not recognize compensation expense for these stock option grants. At February 3, 2007, approximately 18 million shares of common stock were available for future options under these plans.

      In addition to the stock options described above, the Company awards restricted stock to employees under various plans. The restrictions on these awards generally lapse between one and five years from the date of the awards and expense is recognized over the lapsing cycle. Under APB No. 25, the Company generally recorded expense for restricted stock awards in an amount equal to the fair market value of the underlying stock on the date of award. As of February 3, 2007, approximately six million shares of common stock were available for future restricted stock awards under the 2005 Long-Term Incentive Plan (the “Plan”). The Company has the ability to convert shares available for stock options under the Plan to shares available for restricted stock awards. Four shares available for common stock awards can be converted into one share available for restricted stock awards.

      All awards become immediately exercisable upon certain changes of control of the Company.

      Historically, stock option awards were granted to various employees throughout the organization. Restricted stock awards, however, were limited to approximately 150 associates, including members of the Board of Directors and certain members of senior management. Beginning in 2006, the Company began issuing a combination of stock option and restricted stock awards to those employees who previously received only stock option awards, in an effort to further align those employees’ interests with those of the Company’s non-employee shareholders. As a result, the number of stock option awards granted in 2006 decreased and the number of restricted stock awards granted increased.


    Stock Options

      Changes in options outstanding under the stock option plans are summarized below:

Shares Weighted-
subject average
to option exercise
     (in millions)      price
Outstanding, year-end 2003   60.1     $ 17.62
   Granted 6.7 $ 17.28
   Exercised (4.2 ) $ 7.29
  Canceled or Expired (1.1 ) $ 20.99
 
Outstanding, year-end 2004 61.5 $ 18.20
  Granted 6.8 $ 16.50
  Exercised (7.7 ) $ 9.81
  Canceled or Expired (1.3 ) $ 20.92
 
Outstanding, year-end 2005 59.3 $ 19.03
  Granted 3.2 $ 20.05
  Exercised (9.5 ) $ 13.34
  Canceled or Expired (1.1 ) $ 21.01
 
Outstanding, year-end 2006 51.9   $ 20.09

      A summary of options outstanding and exercisable at February 3, 2007 follows:

Weighted-
average Weighted- Weighted-
Number remaining average Options average
Range of Exercise Prices     outstanding     contractual life     exercise price     exercisable     exercise price
(in millions) (in years) (in millions)
$ 9.90 - $14.93 7.9 4.51 $ 14.45   7.1   $ 14.39
$ 14.94 - $16.39   6.1 8.16   $ 16.35 2.2 $ 16.31
$ 16.40 - $17.31 10.4 5.32 $ 16.97 7.1 $ 16.90
$ 17.32 - $22.99 9.2   4.24 $ 20.96 5.0 $ 21.40
$ 23.00 - $31.91 18.3 3.76 $ 25.13 15.0 $ 25.20
 
$9.90 - $31.91 51.9 4.79 $ 20.09 36.4 $ 20.42

      The weighted-average remaining contractual life for options exercisable at February 3, 2007, was approximately 4.1 years.

    Restricted stock

Restricted
shares Weighted-average
outstanding grant-date
    (in millions)     fair value
Outstanding, year-end 2005   0.7     $ 17.85
   Granted 2.2 $ 20.16
  Lapsed (0.4 ) $ 17.46
  Canceled or Expired (0.1 ) $ 19.41
 
Outstanding, year-end 2006 2.4   $ 20.02


    Adoption of SFAS No. 123(R)

      Effective January 29, 2006, the Company adopted the provisions of SFAS No. 123(R), Share-Based Payment, using the modified-prospective method. Under this method, the Company recognize compensation expense for all share-based awards granted prior to, but not yet vested as of, January 29, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation. For all share-based awards granted on or after January 29, 2006, the Company recognizes compensation expense based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).

      In accordance with the provisions of the modified-prospective transition method, results for prior periods have not been restated. Compensation expense for all share-based awards described above was recognized using the straight-line attribution method applied to the fair value of each option grant, over the requisite service period associated with each award. The requisite service period is typically consistent with the vesting period, except as noted below. Because awards typically vest evenly over the requisite service period, compensation cost recognized through February 3, 2007, is at least equal to the grant-date fair value of the vested portion of all outstanding awards. All of the Company stock-based incentive plans are considered equity plans under SFAS No. 123(R).

      The weighted-average fair value of stock options granted during 2006, 2005 and 2004 was $6.90, $7.70 and $7.91, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model, based on the assumptions shown in the table below. The Black-Scholes model utilizes extensive accounting judgment and financial estimates, including the term employees are expected to retain their stock options before exercising them, the volatility of the Company’s stock price over that expected term, the dividend yield over the term and the number of awards expected to be forfeited before they vest. Using alternative assumptions in the calculation of fair value would produce fair values for stock option grants that could be different than those used to record stock-based compensation expense in the Consolidated Statements of Operations.

      The following table reflects the weighted-average assumptions used for grants awarded to option holders:

     2006      2005      2004
Weighted average expected volatility (based on historical volatility)   27.60 %   30.83 %   30.13 %
Weighted average risk-free interest rate 5.07 % 4.11 % 3.99 %
Expected dividend yield 1.50 % N/A N/A
Expected term (based on historical results) 7.5 years 8.7 years 8.7 years

      The weighted-average risk-free interest rate was based on the yield of a treasury note as of the grant date, continuously compounded, which matures at a date that approximates the expected term of options. During the years presented, prior to 2006, the Company did not pay a dividend, so an expected dividend rate was not included in the determination of fair value for options granted during those years. Using a dividend yield of 1.50% to value options issued in 2005 would have decreased the fair value of each option by approximately $1.60. Expected volatility was determined based upon historical stock volatilities. Implied volatility was also considered. Expected term was determined based upon a combination of historical exercise and cancellation experience as well as estimates of expected future exercise and cancellation experience.

      Under SFAS No. 123(R), the Company records expense for restricted stock awards in an amount equal to the fair market value of the underlying stock on the grant date of the award, over the period the awards lapse.

      Total stock compensation recognized in 2006 was $72. This included $50 for stock options and $22 for restricted shares. A total of $18 of the restricted stock expense was attributable to the wider distribution of restricted shares incorporated into the first quarter 2006 grant of share-based awards, and the remaining $4 of restricted stock expense related to previously issued restricted stock awards. The incremental compensation expense attributable to the adoption of SFAS No. 123(R) in 2006 was $68, pre-tax, or $43 and $0.06 per basic and diluted share, after tax. Stock compensation cost recognized in 2005, related entirely to restricted stock grants, was $7, pre-tax. These costs were recognized as operating, general and administrative expense in the Company’s Consolidated Statements of Operations. The cumulative effect of applying a forfeiture rate to unvested restricted shares at January 29, 2006 was not material.


      If compensation cost for the Company’s stock option plans for the years ended January 28, 2006 and January 29, 2005 had been determined based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, the net earnings and diluted earnings per common share would have been reduced to the pro forma amounts below:

    2005     2004
Net earnings (loss), as reported $ 958 $ (104 )
      Stock-based compensation expense included in net earnings, net of  
          income tax benefits 5   8
      Total stock-based compensation expense determined under fair value
          method for all awards, net of income tax benefits   (34 )   (48 )
Pro forma net earnings (loss)   $ 929   $ (144 )
Earnings (loss) per basic common share, as reported $ 1.32 $ (0.14 )
Pro forma earnings (loss) per basic common share $ 1.28 $ (0.20 )
Earnings (loss) per diluted common share, as reported $ 1.31 $ (0.14 )
Pro forma earnings (loss) per diluted common share $ 1.27 $ (0.20 )

      The total intrinsic value of options exercised in 2006 was $79. The total amount of cash received from the exercise of options granted under share-based payment arrangements was $126. As of February 3, 2007, there was $92 of total unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the Company’s equity award plans. This cost is expected to be recognized over a weighted-average period of approximately one year. The total fair value of options that vested in 2006 was $44.

      Shares issued as a result of stock option exercises may be newly issued shares or reissued treasury shares. Proceeds received from the exercise of options, and the related tax benefit, are utilized to repurchase shares of the Company’s stock under a stock repurchase program adopted by the Company’s Board of Directors. During 2006, the Company repurchased approximately 11 million shares of stock in such a manner.

      For share-based awards granted prior to the adoption of SFAS No. 123(R), the Company’s stock option grants generally contained retirement-eligibility provisions that caused the options to vest upon the earlier of the stated vesting date or retirement. Compensation expense was calculated over the stated vesting periods, regardless of whether certain employees became retirement-eligible during the respective vesting periods. Upon the adoption of SFAS No. 123(R), the Company continued this method of recognizing compensation expense for awards granted prior to the adoption of SFAS No. 123(R). For awards granted on or after January 29, 2006, options vest based on the stated vesting date, even if an employee retires prior to the vesting date. The requisite service period ends, however, on the employee’s retirement-eligible date. As a result, the Company recognizes expense for stock option grants containing such retirement-eligibility provisions over the shorter of the vesting period or the period until employees become retirement-eligible (the requisite service period). As a result of retirement eligibility provisions in stock option awards granted on or after January 29, 2006, approximately $6 of compensation expense was recognized in 2006 prior to the completion of stated vesting periods.

11. C OMMITMENTS AND C ONTINGENCIES

      The Company continuously evaluates contingencies based upon the best available evidence.

      The Company believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable. To the extent that resolution of contingencies results in amounts that vary from the Company’s estimates, future earnings will be charged or credited.


      The principal contingencies are described below:

      Insurance — The Company’s workers’ compensation risks are self-insured in certain states. In addition, other workers’ compensation risks and certain levels of insured general liability risks are based on retrospective premium plans, deductible plans, and self-insured retention plans. The liability for workers’ compensation risks is accounted for on a present value basis. Actual claim settlements and expenses incident thereto may differ from the provisions for loss. Property risks have been underwritten by a subsidiary and are reinsured with unrelated insurance companies. Operating divisions and subsidiaries have paid premiums, and the insurance subsidiary has provided loss allowances, based upon actuarially determined estimates.

      Litigation – On October 6, 2006, the Company petitioned the Tax Court ( In Re: Ralphs Grocery Company and Subsidiaries, formerly known as Ralphs Supermarkets, Inc., Docket No. 20364-06 ) for a redetermination of deficiencies set by the Commissioner of Internal Revenue. The dispute at issue involves a 1992 transaction in which Ralphs Holding Company acquired the stock of Ralphs Grocery Company and made an election under Section 338(h)(10) of the Internal Revenue Code. The Commissioner has determined that the acquisition of the stock was not a purchase as defined by Section 338(h)(3) of the Internal Revenue Code and that the acquisition does not qualify as a purchase. The Company has strong arguments in favor of its position, but due to the inherent uncertainty involved in the litigation process, an adverse decision that could have a material adverse effect on the Company’s financial results is a possible outcome. As of February 3, 2007, an adverse decision would require a cash payment of approximately $363, including interest.

      On February 2, 2004, the Attorney General for the State of California filed an action in Los Angeles federal court ( California, ex rel Lockyer v. Safeway, Inc. dba Vons, a Safeway Company; Albertson’s, Inc. and Ralphs Grocery Company, a division of The Kroger Co. , United States District Court Central District of California, Case No. CV04-0687) alleging that the Mutual Strike Assistance Agreement (the “Agreement”) between the Company, Albertson’s, Inc. and Safeway Inc. (collectively, the “Retailers”), which was designed to prevent the union from placing disproportionate pressure on one or more of the Retailers by picketing such Retailer(s) but not the other Retailer(s) during the labor dispute in southern California, violated Section 1 of the Sherman Act. The lawsuit seeks declarative and injunctive relief. On May 25, 2005, the Court denied a motion for a summary judgment filed by the defendants. Ralphs and the other defendants filed a notice of an interlocutory appeal to the United States Court of Appeals for the Ninth Circuit. On November 29, 2005, the appellate court dismissed the appeal. On December 7, 2006, the Court denied a motion for summary judgment filed by the State of California. The Company continues to believe it has strong defenses against this lawsuit and is vigorously defending it. Although this lawsuit is subject to uncertainties inherent to the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this action will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

      Ralphs Grocery Company is the defendant in a group of civil actions initially filed in 2003 and for which a coordination order was issued on January 20, 2004 in The Great Escape Promotion Cases pending in the Superior Court of California, County of Los Angeles, Case No. JCCP No. 4343. The plaintiffs allege that Ralphs violated various laws protecting consumers in connection with a promotion pursuant to which Ralphs offered travel awards to customers. On February 22, 2006, the Court in The Great Escape Promotion Cases issued an Order granting preliminary approval of the class action settlement. Notice of the class action settlement was sent to class members, and the Court issued an Order finally approving the class action settlement on August 25, 2006. The settlement involved the issuance of coupons and gift cards. While the ultimate cost of the settlement to Ralphs is largely dependent on the rate of coupon redemption, management does not expect that the ultimate resolution of this action will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

      On August 12, 2000, Ralphs Grocery Company, along with several other potentially responsible parties, entered into a consent decree with the U. S. Environmental Protection Agency surrounding the purported release of volatile organic compounds in connection with industrial operations at a property located in Los Angeles, California. The consent decree followed the EPA’s earlier Administrative Order No. 97-18 in which the EPA sought remedial action pursuant to its authority under the Comprehensive Environmental Remediation, Compensation and Liability Act. Under the consent decree, Ralphs contributes a share of the costs associated with groundwater extraction and treatment. The treatment process is expected to continue until at least 2012.

      Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material adverse effect on the Company’s financial position.


      The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made adequate provisions therefor. Nonetheless, assessing and predicting the outcomes of these matters involve substantial uncertainties. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse impact on the Company’s financial condition or results of operation.

      Guarantees – The Company periodically enters into real estate joint ventures in connection with the development of certain properties. The Company usually sells its interests in such partnerships upon completion of the projects. As of February 3, 2007, the Company was a partner with 50% ownership in three real estate joint ventures for which it has guaranteed approximately $6 of debt incurred by the ventures. Based on the covenants underlying this indebtedness as of February 3, 2007, it is unlikely that the Company will be responsible for repayment of these obligations.

      Assignments – The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. The Company could be required to satisfy the obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of the Company’s assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote.

12. S UBSEQUENT E VENTS

      On March 15, 2007, the Company announced its Board of Directors declared the payment of a quarterly dividend of $0.075 per share, payable on June 1, 2007, to shareholders of record as of the close of business on May 15, 2007.

13. S TOCK

    Preferred Stock

      The Company has authorized 5 million shares of voting cumulative preferred stock; 2 million were available for issuance at February 3, 2007. The stock has a par value of $100 and is issuable in series.

    Common Stock

      The Company has authorized 1 billion shares of common stock, $1 par value per share. On May 20, 1999, the shareholders authorized an amendment to the Amended Articles of Incorporation to increase the authorized shares of common stock from 1 billion to 2 billion when the Board of Directors determines it to be in the best interest of the Company.

    Common Stock Repurchase Program

      The Company maintains a stock repurchase program that complies with Securities Exchange Act Rule 10b5-1 to allow for the orderly repurchase of Kroger stock, from time to time. The Company made open market purchases totaling $374, $239 and $291 under this repurchase program in fiscal 2006, 2005 and 2004. In addition to this repurchase program, in December 1999, the Company began a program to repurchase common stock to reduce dilution resulting from its employee stock option plans. This program is solely funded by proceeds from stock option exercises, including the tax benefit. The Company repurchased approximately $259, $13 and $28 under the stock option program during fiscal 2006, 2005 and 2004, respectively.

14. B ENEFIT P LANS

      The Company administers non-contributory defined benefit retirement plans for substantially all non-union employees and some union-represented employees as determined by the terms and conditions of collective bargaining agreements. These included several qualified pension plans (the “Qualified Plans”) and a non-qualified plan (the “Non-Qualified Plan”). The Non-Qualified Plan pays benefits to any employee that earns in excess of the maximum allowed for the Qualified Plans by Section 415 of the Internal Revenue Code. The Company only funds obligations under the Qualified Plans. Funding for the pension plans is based on a review of the specific requirements and on evaluation of the assets and liabilities of each plan.


      In addition to providing pension benefits, the Company provides certain health care benefits for retired employees. The majority of the Company’s employees may become eligible for these benefits if they reach normal retirement age while employed by the Company. Funding of retiree health care benefits occurs as claims or premiums are paid.

      Effective February 3, 2007, the Company adopted the recognition and disclosure provisions of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statement No. 87, 99, 106 and 123(R), which required the recognition of the funded status of its retirement plans on the Consolidated Balance Sheet. Actuarial gains or losses, prior service costs or credits and transition obligations that have not yet been recognized are now required to be recorded as a component of Accumulated Other Comprehensive Income (“AOCI”). The following table reflects the effects the adoption of SFAS No. 158 had on our Consolidated Balance Sheet as of February 3, 2007.

      Before After
Application of Application of
February 3, 2007     SFAS No. 158     Adjustments     SFAS No. 158
Other assets     $ 497     $ (8 )   $ 489
Total assets   $ 21,223 $ (8 ) $ 21,215
Deferred income taxes $ 792 $ (70 ) $ 722
Other long-term liabilities $ 1,653 $ 182 $ 1,835
Total liabilities $ 16,180 $ 112 $ 16,292
Accumulated other comprehensive loss $ (139 ) $ (120 ) $ (259 )
Total shareowners’ equity $ 5,043 $ (120 ) $ 4,923
Total liabilities and shareowners’ equity $ 21,223 $ (8 ) $ 21,215

      Amounts recognized in AOCI as of February 3, 2007 consist of the following (pre-tax):

      February 3, 2007     Pension Benefits     Other Benefits     Total
Unrecognized net actuarial loss $ 433 $ 28 $ 461
Unrecognized prior service cost (credit) 7 (42 ) (35 )
Unrecognized transition obligation   1         1  
 
Total liabilities $ 441   $ (14 ) $ 427  

      Amounts in AOCI expected to be recognized as components of net periodic pension or postretirement benefit costs in 2007 are as follows (pre-tax):

      February 3, 2007     Pension Benefits     Other Benefits     Total  
Net actuarial loss   $ 35   $     $ 35
Prior service cost   2   (6 )   (4 )
 
Total liabilities $ 37 $ (6 ) $ 31


      Information with respect to change in benefit obligation, change in plan assets, the funded status of the plans recorded in the Consolidated Balance Sheets, net amounts recognized at end of fiscal years, weighted average assumptions and components of net periodic benefit cost follow:

Pension Benefits
Qualified Plans Non-Qualified Plan Other Benefits
    2006     2005     2006     2005     2006     2005
Change in benefit obligation:
Benefit obligation at beginning of fiscal year   $ 2,284     $ 2,019     $ 105     $ 113     $ 356     $ 366  
          Service cost 123 118 2 1 13 12
          Interest cost 130 113 6 6 20 19
          Plan participants’ contributions 11 9
          Amendments 3 4
          Actuarial (gain) loss (4 ) 145 7 (12 ) 4 (22 )
          Benefits paid   (114 )   (111 )   (7 )   (6 )   (31 )   (32 )
 
Benefit obligation at end of fiscal year $ 2,419   $ 2,284   $ 113   $ 105   $ 373   $ 356  
 
Change in plan assets:
Fair value of plan assets at beginning of fiscal year $ 1,814 $ 1,458 $ $ $ $
          Actual return on plan assets 248 167
          Employer contributions 150 300 7 6 20 23
          Plan participants’ contributions 11 9
          Benefits paid   (114 )   (111 )   (7 )   (6 )   (31 )   (32 )
 
Fair value of plan assets at end of fiscal year $ 2,098   $ 1,814   $   $   $   $  
 
Funded status at end of fiscal year $ (321 ) $ (470 ) $ (113 ) $ (105 ) $ (373 ) $ (356 )
 
 
Pension Benefits
Qualified Plans Non-Qualified Plan Other Benefits
    2006 (1)     2005     2006 (1)     2005     2006 (1)     2005
          Funded status at end of year $ (321 ) $ (470 ) $ (113 ) $ (105 ) $ (373 ) $ (356 )
          Unrecognized actuarial (gain) loss 541 27 23
          Unrecognized prior service cost 9 8 (49 )
          Unrecognized net transition (asset) obligation       (1 )       1         1  
 
Net asset (liability) recognized at end of fiscal year $ (321 ) $ 79   $ (113 ) $ (69 ) $ (373 ) $ (381 )
 
Accrued benefit liability $ (321 ) $ (217 ) $ (113 ) $ (112 ) $ (386 ) $ (381 )
Additional minimum liability (80 ) 12
Intangible asset 10 8
Accumulated other comprehensive loss       366         23     14      
 
Net asset (liability) recognized at end of fiscal year $ (321 ) $ 79   $ (113 ) $ (69 ) $ (372 ) $ (381 )

    (1)     Effective February 3, 2007, the Company adopted SFAS No. 158.

      As of February 3, 2007, pension plan assets included no shares of The Kroger Co. common stock. Pension plan assets included $52, or 2.7 million shares, of common stock of The Kroger Co. at January 28, 2006.



Pension Benefits Other Benefits
Weighted average assumptions     2006     2005     2004     2006     2005     2004
Discount rate – Benefit obligation 5.90 % 5.70 %     5.90 %   5.70 %
Discount rate – Net periodic benefit cost 5.70 %   5.75 %   6.25 % 5.70 % 5.75 %   6.25 %
Expected return on plan assets   8.50 % 8.50 % 8.50 %  
Rate of compensation increase 3.50 % 3.50 % 3.50 %  

      The Company’s discount rate assumption was intended to reflect the rate at which the pension benefits could be effectively settled. It takes into account the timing and amount of benefits that would be available under the plan. The Company’s methodology for selecting the discount rate as of year-end 2006 was to match the plan’s cash flows to that of a yield curve that provides the equivalent yields on zero-coupon corporate bonds for each maturity. Benefit cash flows due in a particular year can be “settled” theoretically by “investing” them in the zero-coupon bond that matures in the same year. The discount rate is the single rate that produces the same present value of cash flows. The selection of the 5.90% discount rate as of year-end 2006 represents the equivalent single rate under a broad-market AA yield curve constructed by the Company’s outside consultant, Mercer Human Resource Consulting. We utilized a discount rate of 5.70% for year-end 2005. The 20 basis point increase in the discount rate decreased the projected pension benefit obligation as of February 3, 2007, by approximately $68 million.

      To determine the expected return on pension plan assets, the Company contemplates current and forecasted plan asset allocations as well as historical and forecasted returns on various asset categories. The average annual return on pension plan assets was 9.7% for the ten calendar years ended December 31, 2006, net of all fees and expenses. Our actual return for the pension plan calendar year ending December 31, 2006, on that same basis, was 13.4%. The Company utilized a pension return assumption of 8.5% in 2006, 2005 and 2004.

      In 2005, the Company updated the mortality table used to determine average life expectancy in the calculation of its pension obligation to the RP-2000 Projected to 2015 mortality table. The change in this assumption increased the projected benefit obligation approximately $93, at the time of the change, and is reflected in unrecognized actuarial (gain) loss as of the measurement date.

Pension Benefits
Qualified Plans Non- Qualifie d Plan Other Benefits
    2006     2005     2004     2006     2005     2004     2006     2005     2004
Components of net periodic benefit cost:
      Service cost   $ 123     $ 118   $ 106   $ 2 $ 1   $ 1   $ 13     $ 12   $ 10  
      Interest cost 130 113 109 6 6 6 20 19 21
      Expected return on plan assets (152 ) (130 ) (121 )
      Amortization of:
           Transition asset (1 ) (1 ) (1 )
           Prior service cost 3 3 3 2 2 2 (7 ) (7 ) (5 )
           Actuarial (gain) loss 41 24 9 2 2 3
      Curtailment charge   5                            
 
Net periodic benefit cost $ 149   $ 127   $ 105   $ 12 $ 11 $ 12 $ 26   $ 24   $ 26  

      The following table provides the projected benefit obligation (“PBO”), accumulated benefit obligation (“ABO”) and the fair value of plan assets for all Company-sponsored pension plans.

Qualified Plans Non-Qualified Plan
    2006     2005     2006     2005
PBO at end of fiscal year   $ 2,419   $ 2,284 $ 113 $ 105
ABO at end of fiscal year $ 2,232 $ 2,111 $ 103 $ 100
Fair value of plan assets at end of year $ 2,098 $ 1,814 $ $


      The following table provides information about the Company’s estimated future benefit payments.

    Pension     Other  
    Benefits          Benefits  
2007   $           139 $ 22
2008   $           138 $ 23
2009   $           145 $ 24
2010   $           142 $ 26
2011   $           137 $ 27
2012 - 2016   $           775 $ 152

      The Company discontinued the accrual of additional benefits under the Company’s cash balance formula of the Consolidated Retirement Benefit Plan (the “Cash Balance Plan”) effective January 1, 2007. Participants in the Cash Balance Plan will continue to earn interest credits on their accrued benefit balance as of December 31, 2006, based on average Treasury rates, but will no longer accrue cash balance pay credits under the Cash Balance Plan after December 31, 2006. Projected pension benefit payments, as noted above, are lower than estimates in prior years as a result of the discontinuation of benefit accruals under the Cash Balance Plan. As a result of the decision to discontinue accruing additional benefits under the Cash Balance Plan, the Company recorded a charge totaling $5, pre-tax, which represented the previously unrecognized prior service costs.

      Effective January 1, 2007, the Cash Balance Plan was replaced with a 401(k) Retirement Savings Account Plan, which will provide both Company matching contributions and other Company contributions based upon length of service, to eligible employees.

      The following table provides information about the target and actual pension plan asset allocations. Allocation percentages are shown as of December 31 for each respective year. The pension plan measurement date is the December 31 st nearest the fiscal year-end.

  Target Actual
  allocations allocations
  2006      2006      2005
Pension plan asset allocation, as of December 31:        
          Domestic equity securities   21.4 %   21.1 % 36.1 %
          International equity securities   24.5   27.5     25.2  
          Investment grade debt securities   25.0   23.3   17.8  
          High yield debt securities   8.0   7.7   7.6  
          Private equity   5.0   4.9   4.2  
          Hedge funds   7.6   7.4   3.8  
          Real estate   1.5   1.4   1.1  
          Other   7.0    6.7   4.3  
 
Total   100.0 % 100.0 % 100.0 %

      Investment objectives, policies and strategies are set by the Pension Investment Committee (the “Committee”) appointed by the CEO. The primary objectives include holding, protecting and investing the assets and distributing benefits to participants and beneficiaries of the pension plans. Investment objectives have been established based on a comprehensive review of the capital markets and each underlying plan’s current and projected financial requirements. The time horizon of the investment objectives is long-term in nature and plan assets are managed on a going-concern basis.

      Investment objectives and guidelines specifically applicable to each manager of assets are established and reviewed annually. Derivative instruments may be used for specified purposes. Any use of derivative instruments for a purpose or in a manner not specifically authorized is prohibited, unless approved in advance by the Committee.

      The current target allocations shown represent 2006 targets that were established in 2005. To maintain actual asset allocations consistent with target allocations, assets are reallocated or rebalanced periodically. Cash flow from employer contributions and participant benefit payments is used to fund underweight asset classes and divest overweight asset classes, as appropriate. The Company expects that cash flow will be sufficient to meet most rebalancing needs. The Company made cash contributions of $150, $300 and $35 in 2006, 2005 and 2004, respectively. Although the Company is not required to make any cash contributions during fiscal 2007, it made a $50 cash contribution to its plans on February 5, 2007. Additional contributions may be made if the Company’s cash flow from operations exceeds its expectations. The Company expects any voluntary contributions made during 2007 will reduce its minimum required contributions in future years.


      The measurement date for post-retirement benefit obligations is the December 31 st nearest the fiscal year-end. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The Company used a 9.00% initial health care cost trend rate and a 5.00% ultimate health care cost trend rate to determine its expense. A one-percentage-point change in the assumed health care cost trend rates would have the following effects:

  1% Point 1% Point
  Increase      Decrease
Effect on total of service and interest cost components   $ 5 $ (4 )
Effect on postretirement benefit obligation   $ 45 $ (39 )

      On December 8, 2003, the President signed into law the Medicare Prescription Drug Improvement and Modernization Act of 2003. The law provides for a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit at least actuarially equivalent to the benefit established by the law. We have concluded that our plan is at least “actuarially equivalent” to the Medicare Part D plan for certain covered groups only, and will be eligible for the subsidy for those groups. The effect of the subsidy reduced our postretirement benefit obligation $6 at both February 3, 2007, and January 28, 2006, and did not have a material effect on our net periodic benefit cost in either of those years. The remaining groups’ benefits are not “actuarially equivalent” to the Medicare Part D plan and we have made the decision to pay as secondary coverage to Medicare Part D for those groups.

      The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed in equal number by employers and unions. The trustees typically are responsible for determining the level of benefits to be provided to participants as well as for such matters as the investment of the assets and the administration of the plans.

      The Company recognizes expense in connection with these plans as contributions are funded, in accordance with GAAP. The Company made contributions to these plans, and recognized expense, of $204 in 2006, $196 in 2005, and $180 in 2004. The Company estimates it would have contributed an additional $2 million in 2004, but its obligation to contribute was suspended during the labor dispute in southern California.

      Based on the most recent information available to it, the Company believes that the present value of actuarial accrued liabilities in most or all of these multi-employer plans substantially exceeds the value of the assets held in trust to pay benefits. Although underfunding can result in the imposition of excise taxes on contributing employers, factors such as increased contributions, increased asset values or future service benefit changes can reduce underfunding so that excise taxes are not triggered. Moreover, if the Company were to exit certain markets or otherwise cease making contributions to these funds, the Company could trigger a substantial withdrawal liability. Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with GAAP.

      The Company also administers certain defined contribution plans for eligible union and non-union employees. The cost of these plans for 2006, 2005 and 2004 was $8, $8 and $12, respectively.

15. R ECENTLY A DOPTED A CCOUNTING S TANDARDS

      In December 2004, the FASB issued SFAS No. 123 (Revised 2002), Share-Based Payment (“SFAS No. 123(R)”), which replaced SFAS No. 123, superseded APB No. 25 and related interpretations and amended SFAS No. 95, Statement of Cash Flows . SFAS No 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as compensation cost based on their fair value on the date of grant. The Company adopted the provisions of SFAS No. 123(R) in the first quarter of 2006. The implementation of SFAS No. 123(R) reduced net earnings $0.06 per diluted share in 2006. See Note 10 for further discussion of the effect the adoption of SFAS No. 123(R) had on the Company’s Consolidated Financial Statements.


      In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 99, 106, and 123(R). SFAS No. 158 requires an employer that sponsors one or more single-employer defined benefit plans to recognize in its statement of financial position an asset for a plan’s overfunded status or a liability for a plan’s underfunded status. In addition, SFAS No. 158 requires an employer to measure a plan’s assets and obligations and determine its funded states as of the end of the employer’s fiscal year and recognize changes in the funded status of a defined benefit postretirement plan in the year the changes occur and that those changes be recorded in comprehensive income, net of tax, as a separate component shareowners’ equity. SFAS No. 158 also requires additional footnote disclosure. The recognition and disclosure provisions of SFAS No. 158 became effective for the Company on February 3, 2007. The measurement date provisions of SFAS No. 158 will become effective for the Company’s fiscal year beginning on February 1, 2009. See Note 14 for the effects the implementation of SFAS No. 158 had on the Company’s Consolidated Financial Statements.

16. R ECENTLY I SSUED A CCOUNTING S TANDARDS

      In June 2006, the FASB issued Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 becomes effective for the Company’s fiscal year beginning February 4, 2007. The Company is evaluating the effect the implementation of FIN No. 48 will have on its Consolidated Financial Statements.

      In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement . SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurement. SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 will become effective for the Company’s fiscal year beginning February 3, 2008. The Company is evaluating the effect the implementation of SFAS No. 157 will have on its Consolidated Financial Statements.

      In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to make an irrevocable election to measure certain financial instruments and other assets and liabilities at fair value on an instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option has been elected should be recognized into net earnings at each subsequent reporting date. SFAS No. 159 will be become effective for the Company’s fiscal year beginning February 3, 2008. The Company is currently evaluating the effect the adoption of SFAS No. 159 will have on its Consolidated Financial Statements.

      In June 2006, the FASB ratified the consensus of Emerging Issues Task Force (“EITF”) issue No. 06-03, How Taxes Get Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation). EITF No. 06-03 indicates that the income statement presentation of taxes within the scope of the Issue on either a gross basis or a net basis is an accounting policy decision that should be disclosed pursuant to Opinion 22. EITF No. 06-03 becomes effective for the Company’s fiscal year beginning February 4, 2007. The Company does not expect the adoption of EITF No. 06-03 to have a material effect on its Consolidated Financial Statements.

17. G UARANTOR S UBSIDIARIES

      The Company’s outstanding public debt (the “Guaranteed Notes”) is jointly and severally, fully and unconditionally guaranteed by The Kroger Co. and some of its subsidiaries (the “Guarantor Subsidiaries”). At February 3, 2007, a total of approximately $5,916 of Guaranteed Notes was outstanding. The Guarantor Subsidiaries and non-guarantor subsidiaries are wholly-owned subsidiaries of The Kroger Co. Separate financial statements of The Kroger Co. and each of the Guarantor Subsidiaries are not presented because the guarantees are full and unconditional and the Guarantor Subsidiaries are jointly and severally liable. The Company believes that separate financial statements and other disclosures concerning the Guarantor Subsidiaries would not be material to investors.

      The non-guaranteeing subsidiaries represent less than 3% on an individual and aggregate basis of consolidated assets, pre-tax earnings, cash flow, and equity for all periods presented, except for consolidated pre-tax earnings in 2004. Therefore, the non-guarantor subsidiaries’ information is not separately presented in the balance sheets and the statements of cash flows, but rather is included in the column labeled “Guarantor Subsidiaries,” for those periods. The non-guaranteeing subsidiaries represented approximately 10% of 2004 consolidated pre-tax earnings. Therefore, the non-guarantor subsidiaries information is separately presented in the Condensed Consolidated Statements of Operations for 2004.


      There are no current restrictions on the ability of the Guarantor Subsidiaries to make payments under the guarantees referred to above, except, however, the obligations of each guarantor under its guarantee are limited to the maximum amount as will result in obligations of such guarantor under its guarantee not constituting a fraudulent conveyance or fraudulent transfer for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act, or any similar Federal or state law (e.g., adequate capital to pay dividends under corporate laws).

      The following tables present summarized financial information as of February 3, 2007 and January 28, 2006 and for the three years ended February 3, 2007.

Condensed Consolidating

Balance Sheets

As of February 3, 2007

Guarantor
The Kroger Co.      Subsidiaries      Eliminations      Consolidated
Current assets
    Cash $ 25 $ 164 $ $ 189  
    Store deposits in-transit 69   545   614
    Receivables   168   1,982     (1,372 ) 778
    Net inventories 406 4,203 4,609
    Prepaid and other current assets   371     194         565  
 
          Total current assets 1,039 7,088 (1,372 ) 6,755
Property, plant and equipment, net 1,429 10,350 11,779
Goodwill, net   56 2,136 2,192
Other assets   647 1,149 (1,307 ) 489
Investment in and advances to subsidiaries   11,510         (11,510 )    
 
          Total Assets $ 14,681   $ 20,723   $ (14,189 ) $ 21,215  
 
Current liabilities
    Current portion of long-term debt including obligations
          under capital leases and financing obligations   $ 906 $ $ $ 906
    Accounts payable 1,614 4,869 (2,679 ) 3,804
    Other current liabilities   (537 )   3,408         2,871  
 
          Total current liabilities 1,983 8,277 (2,679 ) 7,581
Long-term debt including obligations under capital leases and
    financing obligations
    Face value long-term debt including obligations under
          capital leases and financing obligations 6,136 6,136
    Adjustment to reflect fair value interest rate hedges   18             18  
 
    Long-term debt including obligations under capital leases
          and financing obligations 6,154 6,154
Other long-term liabilities   1,621     936         2,557  
 
          Total Liabilities   9,758     9,213     (2,679 )   16,292  
Shareowners’ Equity   4,923     11,510     (11,510 )   4,923  
 
          Total Liabilities and Shareowners’ equity $ 14,681   $     20,723   $    (14,189 ) $     21,215  



Condensed Consolidating

Balance Sheets

As of January 28, 2006

 
         Guarantor        
    The Kroger Co.        Subsidiaries        Eliminations        Consolidated
Current assets                
    Cash $ 39   $ 171 $   $ 210  
    Store deposits in-transit   46     442       488
    Receivables   1,088     526   (928 )   686
    Net inventories   460     4,026       4,486
    Prepaid and other current assets   355     241         596  
 
          Total current assets   1,988     5,406   (928 )   6,466
Property, plant and equipment, net   1,255     10,110       11,365
Goodwill, net   56     2,136       2,192
Other assets     (509 )   968       459
Investment in and advances to subsidiaries   10,808         (10,808 )    
 
          Total Assets $ 13,598   $ 18,620   $ (11,736 ) $ 20,482  
 
Current liabilities                
    Current portion of long-term debt including obligations                
          under capital leases and financing obligations   $ 554   $ $   $ 554
    Accounts payable   263     4,215   (928 )   3,550
    Other current liabilities   (151 )   2,762         2,611  
 
          Total current liabilities   666     6,977   (928 )   6,715
Long-term debt including obligations under capital leases and                
    financing obligations                
    Face value long-term debt including obligations under                
          capital leases and financing obligations   6,651           6,651
    Adjustment to reflect fair value interest rate hedges   27           27
 
    Long-term debt including obligations under capital leases                
          and financing obligations   6,678           6,678
Other long-term liabilities   1,864     835         2,699  
 
          Total Liabilities   9,208     7,812     (928 )   16,092  
Shareowners’ Equity   4,390     10,808     (10,808 )   4,390  
 
          Total Liabilities and Shareowners’ equity $ 13,598   $ 18,620   $ (11,736 ) $ 20,482  



Condensed Consolidating
Statements of Operations
For the Year ended February 3, 2007
 
        Guarantor        
    The Kroger Co.        Subsidiaries        Eliminations        Consolidated
Sales $ 8,731   $ 58,383 $ (1,003 ) $ 66,111
Merchandise costs, including warehousing and transportation   6,630     44,488   (1,003 )   50,115
Operating, general and administrative   1,697     10,142       11,839
Rent   132     517       649
Depreciation and amortization   136     1,136         1,272  
 
    Operating profit   136     2,100       2,236
Interest expense   480     8       488
Equity in earnings of subsidiaries   1,843         (1,843 )    
 
Earnings before tax expense   1,499     2,092   (1,843 )   1,748  
Tax expense     384     249         633  
 
    Net earnings $ 1,115   $ 1,843   $ (1,843 ) $ 1,115  
 
Condensed Consolidating
Statements of Operations
For the Year ended January 28, 2006
 
        Guarantor        
    The Kroger Co.   Subsidiaries   Eliminations   Consolidated
Sales $ 8,693   $ 52,822 $ (962 ) $ 60,553
Merchandise costs, including warehousing and transportation   6,502     40,021   (958 )   45,565
Operating, general and administrative   1,657     9,368   2     11,027
Rent   165     502   (6 )   661
Depreciation and amortization   139     1,126         1,265  
 
    Operating profit   230     1,805       2,035
Interest expense   498     12       510
Equity in earnings of subsidiaries   1,164         (1,164 )    
 
Earnings before tax expense   896     1,793   (1,164 )   1,525
Tax expense (benefit)   (62 )   629         567  
 
    Net earnings $ 958   $ 1,164   $ (1,164 ) $ 958  



Condensed Consolidating
Statements of Operations
For the Year ended January 29, 2005
 
  Guarantor   Non-Guarantor
  The Kroger Co.        Subsidiaries        Subsidiaries        Eliminations      Consolidated
Sales $ 8,003   $ 49,432 $ 41   $ (1,042 ) $ 56,434  
Merchandise costs, including warehousing and
    transportation 6,420   36,721   (1,001 ) 42,140
Operating, general and administrative   1,126     9,494 (9 )     10,611  
Rent   194 527 (41 ) 680
Depreciation and amortization   110     1,142 4       1,256  
Goodwill impairment charge       904              904  
 
    Operating profit   153     644 46       843  
Interest expense 529 6 22 557
Equity in earnings of subsidiaries   430             (430 )    
 
Earnings before tax expense   54     638 24     (430 ) 286  
Tax expense   158     231      1         390  
 
    Net earnings (loss) $ (104 ) $ 407   $ 23   $ (430 ) $ (104 )



Condensed Consolidating
Statements of Operations
For the Year ended February 3, 2007
        Guarantor    
    The Kroger Co.        Subsidiaries        Consolidated
Net cash provided by operating activities   $ 152     $   2,199     $   2,351  
 
          Cash flows from investing activities:              
                      Capital expenditures     (143 )     (1,540 )     (1,683 )  
                      Other     56     40     96  
 
Net cash used by investing activities     (87 )     (1,500 )     (1,587 )  
 
          Cash flows from financing activities:              
                      Proceeds from issuance of long-term debt     362         362  
                      Reductions in long-term debt     (556 )         (556 )  
                      Proceeds from issuance of capital stock     168         168  
                      Capital stock reacquired     (633 )         (633 )  
                      Dividends paid     (140 )         (140 )  
                      Other     18     (4 )     14  
                      Net change in advances to subsidiaries     702     (702 )      
 
Net cash used by financing activities     (79 )     (706 )     (785 )  
 
Net decrease in cash and temporary cash investments     (14 )     (7 )     (21 )  
          Cash and temporary investments:              
                      Beginning of year     39     171     210  
 
                      End of year   $ 25   $   164   $   189  



Condensed Consolidating
Statements of Operations
For the Year ended January 28, 2006
        Guarantor    
    The Kroger Co.        Subsidiaries        Consolidated
Net cash provided by operating activities   $   1,171     $   1,021     $   2,192  
 
          Cash flows from investing activities:              
                      Capital expenditures     (188 )     (1,118 )     (1,306 )  
                      Other     11     16     27  
 
Net cash used by investing activities     (177 )     (1,102 )     (1,279 )  
 
          Cash flows from financing activities:              
                      Proceeds from issuance of long-term debt     14         14  
                      Reductions in long-term debt     (764 )     (33 )     (797 )  
                      Proceeds from issuance of capital stock     78         78  
                      Capital stock reacquired     (252 )         (252 )  
                      Other     77     33     110  
                      Net change in advances to subsidiaries     (140 )     140      
 
Net cash provided (used) by financing activities     (987 )     140     (847 )  
 
Net increase in cash and temporary cash investments     7     59     66  
          Cash and temporary investments:              
                      Beginning of year     32     112     144  
 
                      End of year   $   39   $   171   $   210  



Condensed Consolidating
Statements of Operations
For the Year ended January 29, 2005
        Guarantor    
    The Kroger Co.        Subsidiaries        Consolidated
Net cash provided by operating activities   $   (890 )     $   3,220     $   2,330  
 
          Cash flows from investing activities:                
                      Capital expenditures     (161 )     (1,473 )     (1,634 )  
                      Other     22     4     26  
 
Net cash used by investing activities     (139 )     (1,469 )     (1,608 )  
 
          Cash flows from financing activities:              
                      Proceeds from issuance of long-term debt     616         616  
                      Reductions in long-term debt     (724 )     (286 )     (1,010 )  
                      Proceeds from issuance of capital stock     25         25  
                      Capital stock reacquired     (319 )         (319 )  
                      Other     (27 )     (22 )     (49 )  
                      Net change in advances to subsidiaries     1,464     (1,464 )      
 
Net cash provided (used) by financing activities     1,035     (1,772 )     (737 )  
 
Net (decrease) increase in cash and temporary cash investments     6     (21 )     (15 )  
          Cash and temporary investments:              
                      Beginning of year     26     133     159  
 
                      End of year   $   32   $   112   $   144  


18. Q UARTERLY D ATA (U NAUDITED )

    Quarter    
    First   Second   Third   Fourth   Total Year
2006        (16 Weeks)        (12 Weeks)        (12 Weeks)        (13 Weeks)        (53 Weeks)
Sales $ 19,415 $ 15,138 $ 14,699 $ 16,859 $ 66,111
Net earnings $ 306 $ 209 $ 215 $ 385 $ 1,115
Net earnings per basic common share $ 0.42 $ 0.29 $ 0.30 $ 0.55 $ 1.56
Average number of shares used in basic calculation   722   719   712   706   715
Net earnings per diluted common share $ 0.42 $ 0.29 $ 0.30 $ 0.54 $ 1.54
Average number of shares used in diluted calculation   729   725   720   715   723
 
    Quarter    
    First   Second   Third   Fourth   Total Year
2005   (16 Weeks)   (12 Weeks)   (12 Weeks)   (12 Weeks)   (52 Weeks)
Sales $ 17,948 $ 13,865 $ 14,020 $ 14,720 $ 60,553
Net earnings   $ 294 $ 196 $ 185 $ 283 $ 958
Net earnings per basic common share $ 0.40 $ 0.27 $ 0.26 $ 0.39 $ 1.32
Average number of shares used in basic calculation   727   722   724   724   724
Net earnings per diluted common share $ 0.40 $ 0.27 $ 0.25 $ 0.39 $ 1.31
Average number of shares used in diluted calculation   732   730   732   730   731



ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

      None.

ITEM 9A.       CONTROLS AND PROCEDURES.

      As of February 3, 2007, the Chief Executive Officer and the Chief Financial Officer, together with a disclosure review committee appointed by the Chief Executive Officer, evaluated Kroger’s disclosure controls and procedures. Based on that evaluation, Kroger’s Chief Executive Officer and Chief Financial Officer concluded that Kroger’s disclosure controls and procedures were effective as of February 3, 2007.

C HANGES IN I NTERNAL C ONTROL O VER F INANCIAL R EPORTING

      In connection with the evaluation described above, there was no change in Kroger’s internal control over financial reporting during the fiscal quarter ended February 3, 2007, that has materially affected, or is reasonably likely to materially affect, Kroger’s internal control over financial reporting.

M ANAGEMENT’S R EPORT ON I NTERNAL C ONTROL O VER F INANCIAL R EPORTING

      The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control – Integrated Framework , issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that the Company’s internal control over financial reporting was effective as of February 3, 2007.

      Our management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of February 3, 2007, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which can be found in Item 8 of this Form 10-K.

ITEM 9B.       OTHER INFORMATION.

      None.


PART III

ITEM 10.     DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

      The information required by this Item not otherwise set forth below is set forth under the headings Election of Directors and Information Concerning the Board of Directors in the definitive proxy statement to be filed by the Company with the Securities and Exchange Commission and is hereby incorporated by reference into this Form 10-K.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Based solely on its review of the copies of all Section 16(a) forms received by the Company, or written representations from certain persons that no Forms 5 were required by those persons, the Company believes that during fiscal year 2006 all filing requirements applicable to its officers, directors and 10% beneficial owners were timely satisfied, with two exceptions. Mr. Jon C. Flora filed a Form 5 reporting a stock sale that inadvertently was not reported in 2006, and Mr. Carver L. Johnson filed a Form 5 reporting three transactions with the Company in which shares were withheld by the Company to pay tax liabilities associated with restricted stock awards.

EXECUTIVE OFFICERS OF THE COMPANY

      The following is a list of the names and ages of the executive officers and the positions held by each such person or those chosen to become executive officers as of March 30, 2007. Except as otherwise noted, each person has held office for at least five years. Each officer will hold office at the discretion of the Board for the ensuing year until removed or replaced.

Name Age Recent Employment History
Donald E. Becker 58 Mr. Becker was elected Executive Vice President on September 16, 2004 and Senior Vice President on January 26, 2000. Prior to his election, Mr. Becker was appointed President of the Company’s Central Marketing Area in 1996. Before this, Mr. Becker served in a number of key management positions in the Company’s Cincinnati/Dayton Marketing Area, including Vice President of Operations and Vice President of Merchandising. He joined the Company in 1969.
 
William T. Boehm 59 Mr. Boehm was elected Senior Vice President and President, Manufacturing on May 6, 2004. Prior to that he was elected Group Vice President, Logistics effective April 29, 2001. Mr. Boehm joined the Company in 1981 as Director of Economic Research. He was promoted to Vice President, Corporate Planning and Research in 1986. He was named Vice President Grocery Procurement in 1989 and Vice President of Logistics in 1994.
 
David B. Dillon 56 Mr. Dillon was elected Chairman of the Board on June 24, 2004 and Chief Executive Officer effective June 26, 2003. Prior to this, he was elected President and Chief Operating Officer effective January 26, 2000. Upon the merger with Fred Meyer, Inc., he was named President of the combined Company. Prior thereto, Mr. Dillon was elected President and Chief Operating Officer of Kroger effective June 18, 1995. Prior to this he was elected Executive Vice President on September 13, 1990, Chairman of the Board of Dillon Companies, Inc. on September 8, 1992, and President of Dillon Companies, Inc. on April 22, 1986.
 
Kevin M. Dougherty 54 Mr. Dougherty was elected Group Vice President, Logistics effective May 6, 2004. Mr. Dougherty joined the Company as Vice President, Supply Chain Operations in 2001. Before joining the Company, he maintained an independent consulting practice focusing on logistics and operational performance.
 
Jon C. Flora 52 Mr. Flora was elected Senior Vice President effective June 24, 2004. Prior to that, he held a variety of key management positions for the Company including President of the Company’s Michigan Marketing Area and more recently President of the Company’s Great Lakes Marketing Area. He joined the Company in 1971 as a clerk for the Company’s Dillon Stores Division.



Joseph A. Grieshaber, Jr. 49 Mr. Grieshaber was elected Group Vice President, Perishables Merchandising and Procurement, effective August 4, 2003. Prior to this, he held a variety of management positions within the Company, most recently serving as Vice President of Merchandising for the Company’s Great Lakes Marketing Area. Mr. Grieshaber joined the Company in 1983.
 
Paul W. Heldman 55 Mr. Heldman was elected Executive Vice President effective May 5, 2006, Senior Vice President effective October 5, 1997, Secretary on May 21, 1992, and Vice President and General Counsel effective June 18, 1989. Prior to his election, he held various positions in the Company’s Law Department. Mr. Heldman joined the Company in 1982.
 
Scott M. Henderson 51 Mr. Henderson was elected Vice President effective June 26, 2003 and Treasurer effective January 6, 2002. Mr. Henderson joined the Company in 1981 as Manager of Financial Reporting. He held a variety of management positions and was promoted to Vice President of Planning in February 2000.
 
Christopher T. Hjelm 45 Mr. Hjelm joined the Company on August 28, 2005 as Senior Vice President and Chief Information Officer. From February 2005 to July 2005, he was Chief Information Officer of Travel Distribution Services for Cendant Corporation. From July 2003 to November 2004 Mr. Hjelm served as Chief Technology Officer for Orbitz LLC, which was acquired by Cendant Corporation in November 2004. Mr. Hjelm served as Senior Vice President for Technology at eBay Inc. from March 2002 to June 2003, and served as Executive Vice President for Broadband Network Services for At Home Company from June 2001 to February 2002. From January 2000 to June 2001, Mr. Hjelm served as Chairman, President and Chief Executive Officer of ZOHO Corporation. Prior to that, he held various key roles for 14 years with Federal Express Corporation, including that of Senior Vice President and Chief Information Officer.
 
Carver L. Johnson 57 Mr. Johnson was elected Chief Diversity Officer effective June 22, 2006. Prior to his election, Mr. Johnson served as Group Vice President of Management Information Systems. Prior to joining the Company in December 1999, he served as Vice President and Chief Information Officer of Gymboree. From 1993 to 1998, Mr. Johnson was Senior Systems Director of Corporate Services for Sears, Roebuck & Co. He previously held management positions with Jamesway Corp., Linens ‘n Things, and Pay ‘n Save Stores, Inc.
 
Lynn Marmer 54 Ms. Marmer was elected Group Vice President, Corporate Affairs effective January 19, 1998. Prior to her election, Ms. Marmer was an attorney in the Company’s Law Department. Ms. Marmer joined the Company in 1997. Before joining the Company she was a partner in the law firm of Dinsmore & Shohl.
 
Don W. McGeorge 52 Mr. McGeorge was elected President and Chief Operating Officer effective June 26, 2003. Prior to that, he was elected Executive Vice President effective January 26, 2000 and Senior Vice President effective August 10, 1997. Before his election, Mr. McGeorge was President of the Company’s Columbus Marketing Area effective December 29, 1996; and prior thereto President of the Company’s Michigan Marketing Area effective June 20, 1993. Before this he served in a number of key management positions with the Company, including Vice President of Merchandising of the Company’s Nashville Marketing Area. Mr. McGeorge joined the Company in 1977.



W. Rodney McMullen 46 Mr. McMullen was elected Vice Chairman effective June 26, 2003. Prior to that he was elected Executive Vice President, Strategy, Planning and Finance effective January 26, 2000, Executive Vice President and Chief Financial Officer effective May 20, 1999, Senior Vice President effective October 5, 1997, and Group Vice President and Chief Financial Officer effective June 18, 1995. Before that he was appointed Vice President, Control and Financial Services on March 4, 1993, and Vice President, Planning and Capital Management effective December 31, 1989. Mr. McMullen joined the Company in 1978 as a part-time stock clerk.
 
M. Marnette Perry 55 Ms. Perry was elected Senior Vice President effective July 20, 2003. Prior to that she was elected Group Vice President of Perishables Merchandising and Procurement on March 3, 2003. Prior to this she held a variety of significant positions with the Company, including President of the Company’s Michigan Marketing Area, and President of the Company’s Columbus Marketing Area. She joined the Company in 1972.
 
J. Michael Schlotman 49 Mr. Schlotman was elected Senior Vice President effective June 26, 2003, and Group Vice President and Chief Financial Officer effective January 26, 2000. Prior to that he was elected Vice President and Corporate Controller in 1995, and served in various positions in corporate accounting since joining the Company in 1985.
 
Paul J. Scutt 58 Mr. Scutt was elected Senior Vice President of Retail Operations on September 16, 2004 and he was elected Group Vice President of Retail Operations effective May 21, 2002. He has held a number of significant positions with the Company including Regional Vice President of the Company’s Hutchinson operations, and most recently as President of the Company’s Central Marketing Area.
 
M. Elizabeth Van Oflen 49 Ms. Van Oflen was elected Vice President and Controller on April 11, 2003. Prior to her election, she held various positions in the Company’s Finance and Tax Departments. Ms. Van Oflen joined the Company in 1982.
 
Della Wall 55 Ms. Wall was elected Group Vice President, Human Resources effective April 9, 2004. Prior to her election, she held various key positions in the Company’s human resources department, manufacturing group and drug store division, most recently serving as Vice President of Human Resources. Ms. Wall joined the Company in 1971.


ITEM 11.     EXECUTIVE COMPENSATION.

      The information required by this Item is set forth in the sections entitled Compensation of Executive Officers and Information Concerning the Board of Directors in the definitive proxy statement to be filed by the Company with the Securities and Exchange Commission and is hereby incorporated by reference into this Form 10-K.

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

        The following table provides information regarding shares outstanding and available for issuance under the Company’s existing equity compensation plans.

Equity Compensation Plan Information

Plan Category (a) (b) (c)
Number of securities
remaining for future
Number of securities to Weighted-average issuance under equity
be issued upon exercise exercise price of compensation plans
of outstanding options, outstanding options, excluding securities
    warrants and rights     warrants and rights     reflected in column (a)
Equity compensation plans approved by security holders   51,918,179     $ 20.09 17,595,505  
Equity compensation plans not approved by security holders —   $ —  
 
Total 51,918,179   $ 20.09 17,595,505  

      The remainder of the information required by this Item is set forth in the Beneficial Ownership of Common Stock table in the definitive proxy statement to be filed by the Company with the Securities and Exchange Commission and is hereby incorporated by reference into this Form 10-K.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

      This information required by this Item is set forth in the section entitled Related Person Transactions in the definitive proxy statement to be filed by the Company with the Securities and Exchange Commission and is hereby incorporated by reference into this Form 10-K.

ITEM 14.     PRINCIPAL ACCOUNTING FEES AND SERVICES.

      The information required by this Item is set forth in the section entitled Selection of Auditors – Disclosure of Auditor Fees in the definitive proxy statement to be filed by the Company with the Securities and Exchange Commission and is hereby incorporated by reference into this Form 10-K.


PART IV

ITEM 15.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a)1. Financial Statements:
 
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of February 3, 2007 and January 28, 2006
Consolidated Statements of Operations for the years ended February 3, 2007, January 28, 2006 and January 29, 2005
Consolidated Statements of Cash Flows for the years ended February 3, 2007, January 28, 2006 and January 29, 2005
Consolidated Statement of Changes in Shareowners Equity
Notes to Consolidated Financial Statements
 
(a)2. Financial Statement Schedules:
 
There are no Financial Statement Schedules included with this filing for the reason that they are not applicable or are not required or the information is included in the financial statements or notes thereto.
 
(a)3.&(b) Exhibits
 
3.1       Amended Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 20, 2006, filed with the SEC on June 29, 2006.
 
3.2 The Company’s regulations are hereby incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 20, 2006, filed with the SEC on June 29, 2006.
 
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.
 
10.1* Material Contracts - Non-Employee Directors’ Deferred Compensation Plan. Incorporated by reference to Appendix J to Exhibit 99.1 of Fred Meyer, Inc.’s Current Report on Form 8-K dated September 9, 1997, SEC File No. 1-133339.
 
10.2* The Kroger Co. Deferred Compensation Plan for Independent Directors. Incorporated by reference to Exhibit 10.3 to the Company’s Form 10-K for fiscal year ended January 29, 2005.
 
10.3* The Kroger Co. Executive Deferred Compensation Plan. Incorporated by reference to Exhibit 10.4 to the Company’s Form 10-K for fiscal year ended January 29, 2005.
 
10.4* The Kroger Co. 401(k) Retirement Savings Account Restoration Plan.
 
10.5* Dillon Companies, Inc. Excess Benefit Pension Plan.
 
10.6* The Kroger Co. Supplemental Retirement Plans for Certain Benefit Plan Participants.
 
10.7* 2006 Long-Term Bonus Plan. Incorporated by reference to Exhibit 99.1 of The Kroger Co.’s Current Report on Form 8-K filed with the SEC on December 14, 2005.
 
10.8* The Kroger Co. 2005 Long-Term Incentive Plan. Incorporated by reference to Exhibit 4.2 of The Kroger Co.’s Form S-8 filed with the SEC on June 23, 2005.
 
10.9* Form of Restricted Stock Grant Agreement under Long-Term Incentive Plans.
 
10.10* Form of Non-Qualified Stock Option Grant Agreement under Long-Term Incentive Plans.



10.11 Five Year Credit Agreement dated as of November 15, 2006, incorporated by reference to Exhibit 99.1 of The Kroger Co.’s Current Report on Form 8-K filed with the SEC on November 20, 2006.
 
10.12 4(2) Commercial Paper Program Dealer Agreement between The Kroger Co., as Issuer and Banc of America Securities, LLC, as Dealer dated as of December 3, 2003, as amended on July 23, 2004, incorporated by reference to Exhibit 10.15 of The Kroger Co.’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.
 
10.13 4(2) Commercial Paper Program Dealer Agreement between The Kroger Co., as Issuer and Citigroup Global Markets Inc., as Dealer dated as of December 3, 2003, as amended on June 9, 2004, incorporated by reference to Exhibit 10.16 of The Kroger Co.’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.
 
10.14* Disclosure of compensation of non-employee directors. Incorporated by reference to Item 2.02 of The Kroger Co.’s Form 8-K dated December 10, 2004.
 
12.1       Statement of Computation of Ratio of Earnings to Fixed Charges.
 
21.1 Subsidiaries of the Registrant.
 
23.1 Consent of Independent Registered Public Accounting Firm.
 
24.1 Powers of Attorney.
 
31.1 Rule 13a-14(a)/15d-14(a) Certification.
 
31.2 Rule 13a-14(a)/15d-14(a) Certification.
 
32.1   Section 1350 Certifications

* Management contract or compensatory plan or arrangement.


SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    THE KROGER CO.  
 
Dated:  April 4, 2007     By (*David B. Dillon)  
    David B. Dillon  
    Chief Executive Officer  
    (principal executive officer)  
 
Dated:  April 4, 2007   By (*J. Michael Schlotman)  
    J. Michael Schlotman  
    Chief Financial Officer  
    (principal financial officer)  
 
Dated:  April 4, 2007   By (*M. Elizabeth Van Oflen)  
    M. Elizabeth Van Oflen  
    Vice President & Controller  
    (principal accounting officer)  

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on the 4th of April, 2007.

(*Reuben V. Anderson)   Director  
Reuben V. Anderson    
 
(*Robert D. Beyer)   Director  
Robert D. Beyer    
 
(*John L. Clendenin)   Director  
John L Clendenin    
 
(*David B. Dillon)   Chairman and Chief Executive Officer  
David B. Dillon    
 
(*John T. LaMacchia)   Director  
John T. LaMacchia    
 
(*David B. Lewis)   Director  
David B. Lewis    
 
(*Don W. McGeorge)   President, Chief Operating Officer, and Director  
Don W. McGeorge    
 
(*W. Rodney McMullen)   Vice Chairman and Director  
W. Rodney McMullen    
 
(*Jorge P. Montoya)   Director  
Jorge P. Montoya    
 
(*Clyde R. Moore)   Director  
Clyde R. Moore    
 
    Director  
Katherine D. Ortega    
 
(*Susan M. Phillips)   Director  
Susan M. Phillips    



(*Steven R. Rogel)   Director  
Steven R. Rogel    
 
(*James A. Runde)   Director  
James A. Runde    
 
(*Ronald L. Sargent)   Director  
Ronald L. Sargent    
 
(*Bobby S. Shackouls)   Director  
Bobby S. Shackouls    
 
By:    (*Bruce M. Gack)    
Bruce M. Gack    
Attorney-in-fact    


EXHIBIT INDEX

Exhibit No.

3.1       Amended Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 20, 2006, filed with the SEC on June 29, 2006.
 
3.2 The Company’s regulations are hereby incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended May 20, 2006, filed with the SEC on June 29, 2006.
 
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.
 
10.1* Material Contracts - Non-Employee Directors’ Deferred Compensation Plan. Incorporated by reference to Appendix J to Exhibit 99.1 of Fred Meyer, Inc.’s Current Report on Form 8-K dated September 9, 1997, SEC File No. 1-133339.
 
10.2* The Kroger Co. Deferred Compensation Plan for Independent Directors. Incorporated by reference to Exhibit 10.3 to the Company’s Form 10-K for fiscal year ended January 29, 2005.
 
10.3* The Kroger Co. Executive Deferred Compensation Plan. Incorporated by reference to Exhibit 10.4 to the Company’s Form 10-K for fiscal year ended January 29, 2005.
 
10.4* The Kroger Co. 401(k) Retirement Savings Account Restoration Plan.
 
10.5* Dillon Companies, Inc. Excess Benefit Pension Plan.
 
10.6* The Kroger Co. Supplemental Retirement Plans for Certain Benefit Plan Participants.
 
10.7* 2006 Long Term Bonus Plan. Incorporated by reference to Exhibit 99.1 of The Kroger Co.’s Current Report on Form 8-K filed with the SEC on December 14, 2005.
 
10.8* The Kroger Co. 2005 Long-Term Incentive Plan. Incorporated by reference to Exhibit 4.2 of The Kroger Co.’s Form S-8 filed with the SEC on June 23, 2005.
 
10.9* Form of Restricted Stock Grant Agreement under Long-Term Incentive Plans.
 
10.10* Form of Non-Qualified Stock Option Grant Agreement under Long-Term Incentive Plans.
 
10.11 Five Year Credit Agreement dated as of November 15, 2006, incorporated by reference to Exhibit 99.1 of The Kroger Co.’s Current Report on Form 8-K filed with the SEC on November 20, 2006.
 
10.12 4(2) Commercial Paper Program Dealer Agreement between The Kroger Co., as Issuer and Banc of America Securities, LLC, as Dealer dated as of December 3, 2003, as amended on July 23, 2004, incorporated by reference to Exhibit 10.15 of The Kroger Co.’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.
 
10.13 4(2) Commercial Paper Program Dealer Agreement between The Kroger Co., as Issuer and Citigroup Global Markets Inc., as Dealer dated as of December 3, 2003, as amended on June 9, 2004, incorporated by reference to Exhibit 10.16 of The Kroger Co.’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.
 
10.14* Disclosure of compensation of non-employee directors. Incorporated by reference to Item 2.02 of The Kroger Co.’s Form 8-K dated December 10, 2004.
 
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges.
 
21.1 Subsidiaries of the Registrant.
 
23.1 Consent of Independent Registered Public Accounting Firm.



24.1       Powers of Attorney.
 
31.1 Rule 13a-14(a)/15d-14(a) Certification.
 
31.2 Rule 13a-14(a)/15d-14(a) Certification.
 
32.1   Section 1350 Certifications

* Management contract or compensatory plan or arrangement.


EXHIBIT 10.4

THE KROGER CO.
401(k) RETIREMENT SAVINGS ACCOUNT RESTORATION PLAN

Effective as of January 1, 2007

1. Establishment and Purpose of Plan

      Effective as of January 1, 2007, The Kroger Co. (the “Company”) hereby establishes and adopts The Kroger Co. 401(k) Retirement Savings Account Restoration Plan (the “Plan”), as set forth herein. The purpose of the Plan is to provide supplemental retirement benefits to certain employees of the Company and its Affiliates who are unable to receive the full amount of benefits in The Kroger Co. 401(k) Retirement Savings Account Plan due to the limits imposed by the Internal Revenue Code of 1986, as amended (the “Code”) or who participate in The Kroger Co. Executive Deferred Compensation Plan. The Plan is intended to be unfunded and maintained primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees, within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended. The Plan is also intended to comply with the requirements of Section 409A of the Code.

2. Definitions

      As used throughout the Plan, the following capitalized words and phrases shall have the meanings set forth herein:

      (a) “Account” means, individually or collectively, a Participant’s Restoration Company Automatic Contribution Account and Restoration Matching Account.

      (b) “Affiliate” means an organization which is (a) a member of the same controlled group of corporations (as defined in Code Section 414(b)) as the Company, (b) a trade or business under common control (as defined in Code Section 414(c)) with the Company, (c) an organization which is a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Company, or (d) otherwise required to be aggregated with the Company under Code Section 414(o).

      (c) “Beneficiary” means the persons or entities designated by the Participant, in a form and manner acceptable to the Committee, to receive any amount payable from the Plan upon the Participant’s death. If the Participant fails to designate a Beneficiary in accordance herewith, then the Participant’s Beneficiary shall be the Participant’s spouse or, if the Participant does not have a spouse on the Participant’s date of death, the Participant’s estate.

      (d) “Code” means the Internal Revenue Code of 1986, as amended, or any successor or substitute provisions of law in force.

      (e) “Committee” means the Retirement Management Committee, as appointed by the Chief Executive Officer of the Company. If a Retirement Management Committee is not appointed, or if no members are in office, the Company shall have all the powers and duties of the Committee, unless the Company designates another person to have these powers and duties.

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      (f) “Company” means The Kroger Co., an Ohio corporation, or any successor thereto.

      (g) “Company Automatic Contribution Account” shall have the meaning set forth in the definition of “Company Automatic Contribution Account” in the RSA Plan.

      (h) “Company Automatic Contributions” shall have the meaning set forth in the definition of “Company Automatic Contributions in the RSA Plan.

      (i) “Company Matching Contributions” shall have the meaning set forth in the definition of “Company Matching Contributions” in the RSA Plan.

      (j) “Compensation” of a Participant shall have the meaning set forth in the definition of “Compensation” in the RSA Plan, except that Compensation shall be determined without regard to (i) any elective deferrals made by the Participant under the EDC Plan, or (ii) any limitation imposed by Section 401(a)(17) of the Code.

      (k) “Disability” shall have the meaning set forth in the definition of “Disability” in the RSA Plan.

      (l) “EDC Plan” means The Kroger Co. Executive Deferred Compensation Plan, as currently in effect and as it may be amended from time to time.

      (m) “Employee” means any person who the Committee determines is in the employ of the Company or an Affiliate as a common law employee. An independent contractor shall not be considered an Employee on account of rendering services to the Company or an Affiliate in the capacity of an independent contractor. The term Employee does not include Leased Employees.

      (n) “ERISA” means the Employee Retirement Income Security Act of 1974, as amended, or any successor or substitute provisions of law in force.

      (o) “Group” shall have the meaning set forth in Proposed Treasury Regulation Section 1.409A-3(g)(5)(v)(B), or any subsequent guidance.

      (p) “Insolvency” means an entity is unable to pay its debts as they become due, or is subject to a pending proceeding as a debtor under the United States Bankruptcy Code.

      (q) “Leased Employee” means any person treated as a leased employee of the Company under Code Section 414(n) and the Treasury Regulations promulgated thereunder.

      (r) “Matching Account” shall have the meaning set forth in the definition of “Matching Account” in the RSA Plan.

      (s) “Normal Retirement Age” shall have the meaning set forth in the definition of “Normal Retirement Age” in the RSA Plan.

      (t) “Participant” means an Employee who meets the requirements of Section 3(a).

2


      (u) “Plan” means The Kroger Co. 401(k) Retirement Savings Account Restoration Plan, as set forth herein and as it may be amended from time to time.

      (v) “Plan Year” means the calendar year.

      (w) “Restoration Company Automatic Contribution Account” means the portion of the Participant’s Account attributable to Restoration Company Automatic Contributions allocated to such Participant.

      (x) “Restoration Company Automatic Contributions” means the contributions credited to a Participant’s Account pursuant to Section 4(b) of the Plan.

      (y) “Restoration Matching Account” means the portion of the Participant’s Account attributable to Restoration Matching Contributions allocated to such Participant.

      (z) “Restoration Matching Contributions” means the contributions credited to a Participant’s Account pursuant to Section 4(c) of the Plan.

      (aa) “RSA Plan” means The Kroger Co. 401(k) Retirement Savings Account Plan, as it may be amended from time to time.

      (bb) “Salary Redirection Contributions” shall have the meaning set forth in the definition of “Salary Redirection Contributions” in the RSA Plan.

3. Participation

      (a) Eligibility Requirements . An Employee shall be a Participant in this Plan if the Employee is (i) designated by the Committee as eligible to participate in the Plan for the Plan Year, and (ii) is a participant in the RSA Plan who is unable to receive the full Company Automatic Contributions or Company Matching Contributions otherwise provided under the RSA Plan as the result of either (A) the application of the limitations of Code Section 401(a)(17), or (B) the Employee’s elective deferral contributions under the EDC Plan.

      (b) Termination of Participation . An individual shall cease to be a Participant in this Plan when all amounts allocated to the Participant’s Account have been paid under the terms of this Plan.

4. Restoration Benefits

     (a) Eligibility to Receive Restoration Benefits . To be eligible to receive a Restoration Company Automatic Contribution or a Restoration Matching Contribution for a Plan Year, a Participant must be employed by the Company on the last day of the Plan Year, or have separated from service during the Plan Year on or after attaining the Normal Retirement Age, or as the result of the Participant’s Disability, or death.

 

3


      (b) Restoration Company Automatic Contributions . As of the last day of the Plan Year, the Company shall credit an eligible Participant’s Restoration Company Automatic Contribution Account with a Restoration Company Automatic Contribution equal to the excess (if any) of the amount described in clause (i) over the amount described in clause (ii), below:

           (i)       The Company Automatic Contributions which would have been credited to the Participant under the RSA Plan for the Plan Year if the Participant had not made deferrals to the EDC Plan for the Plan Year.
 
(ii) The Company Automatic Contributions actually credited to the Participant’s Company Automatic Contribution Account in the RSA Plan for the Plan Year.

      (c) Restoration Matching Contribution . If for a Plan Year a Participant made the maximum amount of Salary Redirection Contributions permitted under Code Section 402(g), then the Company shall, as of the last day of the Plan Year, credit the eligible Participant’s Restoration Matching Account with the excess (if any) of the amount described in clause (i) over the amount described in clause (ii), below:

           (i)       Four percent (4%) of the Participant’s Compensation for the Plan Year.
 
(ii) The Company Matching Contributions credited to the Participant’s Matching Account in the RSA Plan for the Plan Year.

      (d) Crediting of Earnings . For each Plan Year, a Participant’s Account shall be credited with earnings in an amount determined by the Committee, based on an interest rate that represents the cost to the Company of 10-year debt. The rate in effect for a Plan Year shall be determined by the Committee prior to the first day of each Plan Year. Earnings generally shall be credited on the last day of each Plan Year; provided, however, that if a Participant’s Account is distributed before the last day of a Plan Year, the Account shall be credited with pro-rata earnings through the last day of the month prior to the date of the distribution.

5. Time and Form of Distribution .

      (a) Distribution following Separation from Service . The nonforfeitable portion of a Participant’s Account shall be distributed in a single lump sum payment as soon as administratively practicable on or after July 1 of the calendar year immediately following the calendar year that includes the Participant’s separation from service.

      (b) Distribution upon the Death of a Participant . If a Participant dies before the Participant’s Account has been distributed, the Account shall be distributed to the Participant’s Beneficiary in a single lump sum payment as soon as administratively practicable following the Participant’s death.

      (c) Tax Withholding . The Company may withhold income or other taxes from any distribution of a Participant’s Account if the Company determines that such withholding is necessary or appropriate to comply with any Federal, State or local tax withholding or similar requirements of law.

4


      (d) Payments to Legal Incompetents . Upon proof satisfactory to the Committee that any person entitled to receive a payment under the Plan is legally incompetent to receive the payment, the Committee may direct the payment to be made to a guardian or conservator of the estate of the person. Any payment made under the preceding sentence will release the Company from all further liability to the extent of the payment made.

      (e) Discharge of Obligation . Any payment made by the Company pursuant to the Plan shall, to the extent of the payments made, constitute a complete discharge of all obligations under the Plan of the Company and the Committee. The Committee may require the payee, as a condition precedent to any payment, to execute a receipt and release in a form satisfactory to the Committee. The Committee may also require the payee, as a condition precedent to any payment, to execute an acknowledgement or agreement in a form satisfactory to the Committee concerning repayment of erroneous or duplicate benefits.

      (f) Correction of Mistakes . Any mistake in the amount of a Participant’s benefits under the Plan may be corrected by the Committee when the mistake is discovered. The mistake may be corrected in any reasonable manner authorized by the Committee. In appropriate circumstances (such as where the mistake is not material or is not timely discovered), the Committee may in its sole and absolute discretion waive the making of any correction.

6. Vesting Schedule .

      The nonforfeitable interest of each Participant in the Participant’s Account shall be determined as follows:

      (a) Restoration Matching Account . A Participant shall have a nonforfeitable interest in the entire portion of the Restoration Matching Account.

      (b) Restoration Company Automatic Contribution Account . A Participant shall have a nonforfeitable interest in the Restoration Company Automatic Contribution Account which shall be determined in accordance with the vesting schedule in effect from time to time for the Company Automatic Contribution Account under the RSA Plan.

7. Funding Policy and Method

      This Plan shall be unfunded within the meaning of Section 201(2) of ERISA, and all payments hereunder shall be made from the general assets of the Company, including, at the sole option of the Company, from any assets held in any trust established by the Company the assets of which are subject to the claims of the Company’s general, unsecured creditors in the event of the Company’s Insolvency. No assets shall be irrevocably set aside to pay benefits under the Plan in a manner making the assets unreachable by the Company’s general, unsecured creditors in the event of the Company’s Insolvency. Participants and Beneficiaries shall have no right to any specific assets of the Company by virtue or the existence or terms of the Plan and shall be general, unsecured creditors of the Company at all times with respect to any claim for benefits under the Plan.

5


8. Administration

      The Committee shall be responsible for the operation and administration of the Plan and for carrying out the provisions hereof. The Committee shall have discretionary authority to make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan, and to decide or resolve any and all questions, including interpretations of this Plan, as may arise in connection with this Plan. Any such action taken by the Committee in its discretion shall be final and conclusive on any party. The Committee’s prior exercise of discretionary authority shall not obligate it to exercise its authority in a like fashion thereafter. The Committee may, from time to time, delegate to others, including employees of the Company, such administrative duties as it sees fit.

9. Claims and Appeals

      (a) Payment of Benefits . The payment of benefits due under the Plan shall be made at such times and in such amounts as provided for under the terms of the Plan. Each Participant and Beneficiary shall be obligated provide the Company a current address so that payments may be made as required. The mailing of a payment to the last known mailing address of a Participant or Beneficiary shall be deemed full payment of the amount so mailed.

      (b) Written Claim for Benefits . If a Participant or Beneficiary does not receive payment of benefits under the Plan which the Participant or Beneficiary believes are due under the Plan, the Participant or Beneficiary may file a written claim for benefits with the Committee. The written claim shall be in a form satisfactory to, and with such supporting documentation and information as may be required by, the Committee.

      (c) Denial of Claim . If a Participant’s or Beneficiary’s claim for benefits is denied in whole or in part by the Committee, a written notice will be furnished to the claimant within 90 days after the date the claim was received. If circumstances require a longer period, the claimant will be notified in writing, prior to the expiration of the 90-day period, of the reasons for an extension of time; provided, however, that no extensions will be permitted beyond 90 days after the expiration of the initial 90-day period.

     (d) Reasons for Denial . A denial or partial denial of a claim will clearly set forth:

           (i)       the specific reason or reasons for the denial;
 
(ii) a specific reference to pertinent Plan provisions on which the denial is based;
 
(iii) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and
 
(iv) an explanation of the procedure for review of the denied or partially denied claim, including the claimant’s right to bring a civil action under ERISA section 502(a) following an adverse benefit determination on review.

6


      (e) Review of Denial . Upon denial of a claim, in whole or in part, a claimant or a duly authorized representative of the claimant may request a full and fair review of the denied claim by filing a written notice of appeal with the Committee. Any such appeal must be received by the Committee within 60 days of the date that the notice of the denied claim was received. A claimant or the claimant’s authorized representative will have, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant’s claim for benefits and may submit issues and comments in writing, except for privileged or confidential documentation. The review will take into account all comments, documents, records, and other information submitted by the claimant relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.

      If the claimant fails to file a request for review within 60 days of the notification of denial , the claim will be deemed abandoned and the claimant precluded from reasserting it. If the claimant does file a request for review, the request must include a description of the issues and evidence the claimant deems relevant. Failure to raise issues or present evidence on review will preclude those issues or evidence from being presented in any subsequent proceeding or judicial review of the claim.

      (f) Decision Upon Review . The Committee will provide a written decision on review. If the claim is denied on review, the decision shall set forth:

           (i)       the specific reason or reasons for the adverse determination;
 
(ii) specific reference to pertinent Plan provisions on which the adverse determination is based;
 
(iii) a statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claimant’s claim for benefits; and
 
(iv) a statement describing any voluntary appeal procedures offered by the Plan and the claimant’s right to obtain the information about such procedures, as well as a statement of the claimant’s right to bring a civil action under ERISA section 502(a).

      A decision will be rendered by the Committee as soon as practicable. Ordinarily decisions will be rendered within 60 days following receipt of the request for review. If the need to hold a hearing or special circumstances require additional processing time, the decision shall rendered as soon as possible, but not later than 120 days following receipt of the request for review.

 

7


      (g) Finality of Determinations; Exhaustion of Remedies . To the extent permitted by law, decisions reached under the claims procedures set forth in this Section shall be final and binding on all parties. No legal action for benefits under the Plan shall be brought unless and until the claimant has exhausted all remedies under this Section. In any such legal action, the claimant may only present evidence and theories which the claimant presented during the claims procedure. Any claims which the claimant does not in good faith pursue through the review stage of the procedure shall be treated as having been irrevocably waived. Judicial review of a claimant’s denied claim shall be limited to a determination of whether the denial was an abuse of discretion based on the evidence and theories the claimant presented during the claims procedure. Any suit or legal action initiated by a claimant under the Plan must be brought by the claimant no later than one year following a final decision on the claim for benefits. Notwithstanding the foregoing, in no event may a claimant initiate suit or legal action more than two years after the facts giving rise to the action occurred. The foregoing limitations on suits or legal actions for benefits will apply in any forum where a claimant initiates such suit or legal action.

10. Amendment and Termination of the Plan .

      The Company reserves the right to amend or terminate the Plan at any time by resolution of the Committee. No amendment or termination of the Plan shall deprive a Participant of any portion of the Participant’s vested benefit accrued under the Plan as of the date of the amendment or termination.

11. General Provisions .

      (a) Definition and Plan Interpretation . The capitalized words and phrases used throughout the Plan shall have the meaning set forth in Section 2. Unless otherwise plainly required by the context, any gender may be construed to include all genders, and the singular or plural may be construed to include the plural or singular, respectively. The section headings in the Plan have been inserted for the convenience of reference only and are not to be considered in the interpretation of the Plan.

      (b) Interpretation and Savings Clause . The Plan is intended to comply with Code Section 409A and guidance issued thereunder, and notwithstanding any other provision of this Plan, the Plan shall be interpreted and administered accordingly. If any provision of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof, and the Plan shall be construed and enforced as if such provision had not been included.

      (c) No Employment Rights . Neither the Plan, nor the action of the Company in establishing or continuing the Plan, nor any action taken by the Committee, nor participation in the Plan, shall be construed as giving any person any right to remain in the employ of the Company or an Affiliate or, except as provided in the Plan, the right to any payment or benefit. Nothing in the Plan shall affect the right of the Company or an Affiliate to terminate a person’s employment at any time, with or without cause.

     (d) Assignment or Alienation of Benefits .

           (i)       General Rule . Except as expressly provided in the Plan, the benefits payable under this Plan shall not be subject to assignment or alienation, and any attempt to do so shall be void.
 
(ii) Domestic Relations Orders . Notwithstanding any other provision of the Plan, all or a portion of a Participant’s Account may be paid to another person as specified in a domestic relations order that the Committee determines is a Qualified Domestic Relations Order. For this purpose, a “Qualified Domestic Relations Order” means a judgment, decree, or order (including the approval of a property settlement agreement) that:

8



                           A. is issued pursuant to a State’s domestic relations law;
 
     B. relates to the provision of child support, alimony payments or marital property rights to a spouse, former spouse, child or other dependent of a Participant; and
 
     C. creates or recognizes the existence of an alternate payee’s right to, or assigns to the alternate payee the right to, receive all or a portion of the Participant’s benefits under the Plan;
 
      The Committee shall determine in its sole and absolute discretion whether any document received by it is a Qualified Domestic Relations Order. In making this determination, the Committee may consider the rules applicable to “domestic relations orders” under Code Section 414(p) and Section 206(d) of ERISA, and such other rules and procedures as it deems relevant. If an order is determined to be a Qualified Domestic Relations Order, the amount to which the alternate payee is entitled under the Qualified Domestic Relations Order shall be paid in a single lump-sum payment as soon as practicable after such determination.

      (e) Governing Law . To the extent not preempted by federal law, this Plan shall be interpreted and construed in accordance with the law of the State of Ohio.

      IN WITNESS WHEREOF , The Kroger Co. has caused The Kroger Co. 401(k) Retirement Savings Account Restoration Plan to be executed this 29th day of December, 2006.

THE KROGER CO.  
 
 
By: /s/ Paul Heldman  
 
Title: Executive Vice President, Secretary and  
           General Counsel  

9


ALTERNATIVE REPORTING AND DISCLOSURE STATEMENT
FOR PENSION PLANS FOR CERTAIN SELECTED EMPLOYEES

To the Secretary of Labor:

      In compliance with the requirements of the alternative method of reporting and disclosure under Part 1 of Title I of the Employee Retirement Income Security Act of 1974 for unfunded or insured pension plans for a select group of management or highly compensated employees, specified in Department of Labor Regulations, 29 C.F.R. §2520.104-23, the following information is provided by the undersigned employer.

Name and Address of Employer:   The Kroger Co.  
  1014 Vine Street  
  Cincinnati, Ohio 45202-1141  
 
Employer Identification Number:   31-0345740  

      The Employer maintains a plan (or plans) primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.

Number of Plans and    
Participants in Each    
Plan:   ___________ Plan covering ___________ Employees (or  
  ___________ Plans covering _______ _______ and   
  ___________ Employees, respectively.)  

      Dated:   December 29, 2006.  
 
  By /s/ Paul Heldman  
 
  Title: Executive Vice President, Secretary and  
                General Counsel  
 
                This form should be mailed to:  
 
                                        Top Hat Plan Exemption  
                                        Employee Benefits Security Administration  
                                        Room N-1513  
                                        U.S. Department of Labor  
                                        200 Constitution Avenue, NW
                                        Washington, DC 20210  
 
                          (Send certified mail to evidence filing requirement satisfied)  

10


EXHIBIT 10.5

  

  

DILLON COMPANIES, INC.

EXCESS BENEFIT PENSION PLAN
 
 
 
 
 
 
 
 

Effective January 1, 1994





DILLON COMPANIES, INC.

EXCESS BENEFIT PENSION PLAN

      Dillon Companies, Inc. hereby states, effective as of the 1 " day of January, 1994, the Dillon Companies, Inc. Excess Benefit Pension Plan, established for the sole purpose of providing to participants in the Dillon Companies, Inc. Pension Plan benefits in excess of limitations on benefits imposed by Section 415 of the Internal Revenue Code of 1986 (as amended from time to time) as hereafter provided.

ARTICLE I
Definitions

      1.01 Board of Directors shall mean the Board of Directors of the Company (as defined in Section 1.04).

      1.02 Code shall mean the Internal Revenue Code of 1986, as the same now stand and may hereafter be amended from time to time.

      1.03 Committee shall mean the Retirement Management Committee.

      1.04 Company shall mean Dillon Companies, Inc., a Kansas corporation, its corporate successor and the surviving corporation resulting from any merger of Dillon Companies, Inc. with any other corporation or corporations and shall be deemed to include any other corporation organized and existing under the laws of the United States or any state or the District of Columbia of which 50% of the issued and outstanding stock is owned by Dillon Companies, Inc. or by a subsidiary.

      1.05 Designated beneficiary shall mean a "beneficiary" as defined in the Dillon Companies, Inc. Pension Plan.

      1.06 Insolvency shall be defined as an excess of liabilities over assets as determined in accordance with generally accepted accounting principles.

      1.07 Participant shall mean an individual who at any time on or after January 1, 1994 is a "participant" as defined in the Dillon Companies, Inc. Pension Plan and shall be deemed to include such participant's designated beneficiary as defined in Section 1.05 and, when appropriate, such participant's estate and surviving spouse.

1


      1.08 Pension Plan shall mean the Dillon Companies, Inc. Pension Plan.

      1.09 Plan shall mean this Dillon Companies, Inc. Excess Benefit Pension Plan.

ARTICLE II
Benefits

      2.01 At such time as a participant shall receive a distribution under the Pension Plan, such participant also shall receive a distribution under this Plan in an amount equal to the excess, if any, of (1) the amount such participant would have received under the Pension Plan if the limitations of Code Section 415 did not apply to such distribution and had not applied to the accrual of benefits under the Pension Plan, over (2) the amount of the distribution under the Pension Plan which would have been made but for the Profit Sharing Benefit offset provided under the Pension Plan-

      2.02 The benefit payable to a participant under this Plan shall be paid in the same form as the benefit provided under the Pension Plan; provided, however, that in the sole discretion of the Committee, said benefit may be paid in a single lump sum cash amount, if it does not exceed twenty-five thousand dollars ($25,000). Such lump sum payment shall be the actuarial equivalent of the monthly benefit payable to the participant under Section 2.01 of this Plan. The determination of the lump sum amount shall be calculated in the same manner and using the same actuarial assumptions as used in the calculation of lump sum payments under the Pension Plan.

      2.03 Anything herein to the contrary notwithstanding, if a participant who is entitled to receive a benefit hereunder is discharged from employment with the Company for cause, any benefit payable under the Plan to such participant may, at the discretion of the Company, be forfeited. In such case, the Company shall have no further obligation hereunder to such participant.

ARTICLE III
Administration

      3.01 The Committee shall have full responsibility for administration and operation of the Plan, including complete discretion to make whatever interpretations and decisions which might be necessary under the Plan.

      3.02 A majority of the members of the Committee shall constitute a quorum for the transaction of business.

2


      3.03 The Committee shall have such powers and duties as are specified in this Plan, including, but not limited to, the power to determine all questions regarding claims for benefits and procedures for review of claims for benefits under this Plan, and construction of the terms of this Plan, and such implied powers and duties as may be necessary to carry out the provisions of this Plan.

      3.04 The Company shall indemnify the members of the Committee from all claims for liability, loss or damage (including payment of expenses in connection with the defense against any such claims) arising from any act or failure to act which constitutes a breach of such member's fiduciary responsibilities under any aspects of the law; provided, however, that the Company shall not indemnify any member of the Committee from any claims arising out of the willful misconduct, willful failure to act or gross negligence of such member.

      3.05 No member of the Committee may act, vote or otherwise influence the decision of the Committee specifically relating to such member's benefits under this Plan.

ARTICLE IV
Miscellaneous

      4.01 The Company shall pay all benefits under this Plan from its general assets, including, at the sole option of the Company, from any assets held in any grantor trust, the assets of which are subject to the claims of the Company's general, unsecured creditors in the event of the Company's insolvency, that may be established by the Company. In no event shall the Company irrevocably set aside assets to pay benefits under this Plan in such a manner as to make such assets unreachable by the Company's general, unsecured creditors in the event of the Company's insolvency- No participant shall have, by virtue of this Plan, any right to any specific assets of the Company. All participants, at all times, shall remain general, unsecured creditors of the Company.

      4.02 The Company may, at any time and from time to time, amend, in whole or in part, any or all provisions of this Plan or may terminate this Plan. In the event that the Company terminates this Plan, the Company nevertheless shall pay benefits under this Plan pursuant to the provisions of Article II of this Plan to individuals who, at the time of such termination, are participants; provided, however, that in the event of such termination, the Committee shall determine, under Article II of this Plan, the amount which a participant would have received under the Pension Plan if the limitations of Code Section 415 did not apply to such distributions and had not applied to the accrual of benefits under the Pension Plan only by reference to the years of benefit service, as defined in the Pension Plan, as of the date of such termination.

      4.03 Neither the creation nor the maintenance of this Plan shall entitle any participant to continued employment with the Company.

3


      4.04 No participant shall have the right to assign, transfer, hypothecate, encumber, anticipate, pledge or commute any benefit under this Plan, and no such benefit shall be subject in any way to any legal process, including, but not limited to, levying upon or attaching the same for payment of any claims against any participant.

      4.05 This Plan in all respects shall be construed and interpreted according to the laws of the State of Kansas, and the Company and all participants in all things in respect thereto shall be governed by such laws.

4


EXHIBIT 10.6

 

 

 

THE KROGER CO.
SUPPLEMENTAL RETIREMENT PLANS
FOR CERTAIN RETIREMENT BENEFIT PLAN PARTICIPANTS


THE KROGER CO.
SUPPLEMENTAL RETIREMENT PLANS
FOR CERTAIN RETIREMENT BENEFIT PLAN PARTICIPANTS

Table of Contents
      Page  
  ARTICLE I - INTRODUCTION     1-1  
  1.01        Supplemental Plans Maintained Under this Document     1-1  
    (a) The Kroger Co. Excess Benefit Plan.     1-1  
    (b) The Kroger Co. Section 401(a)(17) Supplemental Plan     1-1  
    (c) The Kroger Co. Tax Reform Transition Plan #1.     1-2  
    (d) The Kroger Co. Tax Reform Transition Plan #2.     1-2  
    (e) The Kroger Co. Tax Reform Transition Plan #3.     1-3  
  1.02     Participating Employers     1-3  
  1.03     Plans for Exclusive Benefit of Employees     1-3  
  1.04   Rights of Employees Not Expanded     1-4  
  1.05   Governing Law and Savings Clause     1-4  
  1.06   Definitions and Plan Interpretation     1-4  
 
ARTICLE II - PLAN PARTICIPATION AND BENEFITS     2-1  
  2.01   Excess Benefit Plan     2-1  
  2.02   Section 401(a)(17) Supplemental Plan     2-1  
  2.03   Tax Reform Transition Plan #1     2-2  
  2.04   Tax Reform Transition Plan #2     2-3  
  2.05   Tax Reform Transition Plan #3     2-4  
  2.06   Participant Repayment of Duplicate Benefits     2-5  
  2.07   Benefits Under Each Plan Are Separate and Limited.     2-6  
 
ARTICLE III - PAYMENT OF BENEFITS     3-1  
  3.01   Timing and Manner of Payment     3-1  
  3.02   Source of Payments.     3-1  
  3.03   Income Tax Withholding, Payroll Taxes, and Other Deductions     3-2    
  3.04   Assignment or Alienation of Benefits     3-2  
  (a) General Rule     3-2  
  (b) Domestic Relations Orders     3-2  
  (c) Protective Action     3-3  
  3.05   Payments to Legal Incompetents .     3-3  
  3.06   Discharge of Obligation; Receipt and Release     3-4  
  3.07   Correction of Mistakes     3-4  
  3.08   Claim Procedures     3-4  
  (a) Written Claim is Not Required     3-4  
  (b) Written Claim May be Filed     3-5  
  (c) Notice of a Claim Denial     3-5  
  (d) Right to a Review of the Denial     3-5  
  (e) Decision on Review.     3-6  
 
ARTICLE IV - PLAN AMENDMENT OR TERMINATION    
  4.01   Plan Amendment     4-1  
  4.02   Plan Termination     4-1  
  4.03   Preservation of Combined Accrued Benefit     4-1  



  ARTICLE V - PLAN ADMINISTRATION     5-1  
  5.01      Company Actions       5-1  
  5.02   Powers and Duties of the Plan Administrator     5-1  
    (a) Identity of the Plan Administrator     5-1  
    (b) Actions of the Plan Administrator     5-1  
    (c) Committee Officers and Agents     5-2  
    (d) General Powers and Duties of the Plan Administrator     5-3  
    (e) Plan Interpretation and Benefit Eligibility     5-3  
  5.03   Reliance         5-4  
  5.04   Exoneration and Indemnification of Certain Individuals     5-4  
  (a) Exoneration       5-4  
  (b) Indemnification       5-5  
  5.05   Communications With Participants About a Plan     5-5  
  (a) Communications to Participants     5-5  
  (b) Communications from Participants     5-6  
  (c) Participant Access to Plan Records     5-6  
  5.06   Payment of Plan Expenses                            _     5-7  
  5.07   Plan's Agent for Service of Legal Process     5-7  
 
ARTICLE VI - ADOPTION OF THE PLANS     6-1  
  6.01   Company Review and Approval of the Plan Document     6-1  
  6.02   Execution of the Plan Document       6-1  
 
APPENDIX A        GLOSSARY      
 
APPENDIX B        PARTICIPATING EMPLOYERS    


ARTICLE I

INTRODUCTION

1.01 Supplemental Plans Maintained Under this Document . The general purpose of the Supplemental Plans set forth in this Plan document is to provide participating Employees with overall retirement benefits from the Company generally comparable to the benefits provided to other participants in the Retirement Benefit Plan who are not affected by the various limitations on benefits which may be provided under the Retirement Benefit Plan to highly compensated employees. The separate Supplemental Plans maintained under this document to accomplish this purpose are as follows:

      (a) The Kroger Co. Excess Benefit Plan . The Kroger Co. amends and restates The Kroger Co. Excess Benefit Plan as set forth in this document and the accompanying appendices. The Plan was originally effective as of January 1, 1978. This restatement of the Plan is effective as of January 1, 1989 and applies only to Participants in the Plan on or after this date. The Excess Benefit Plan is intended to be an unfunded "excess benefit plan" as defined in Section 3(36) of ERISA. The Plan provides for retirement benefits that are lost under the Retirement Benefit Plan because of benefit limitations imposed to comply with Section 415 of the Code.

      (b) The Kroger Co. Section 4(a)(17) Supplemental Plan . The Kroger Co. adopts The Kroger Co. Section 401(a) (17) Supplemental Plan as set forth in this document and the accompanying appendices. The Plan is effective as of January 1, 1989. The Section 401(a)(17) Supplemental Plan is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. The Plan provides for retirement benefits that are lost under the Retirement Benefit Plan because of the compensation limitations imposed to comply with Section 401(a)(17) of the Code.

1-1


      (c) The Kroger Co. Tax Reform Transition Plan #1 . The Kroger Co. adopts The Kroger Co. Tax Reform Transition Plan #1 as set forth in this document and the accompanying appendices. The Plan is effective as of January 1, 1989. The Tax Reform Transition Plan #1 is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. The Plan provides for retirement benefits that are lost under the Retirement Benefit Plan because Super Highly Compensated Employees are not allowed to accrue benefits beyond December 31, 1988 under the Retirement Benefit, Plan's pre-TRA ’86 benefit formula.

      (d) The Kroger Co. Tax Reform Transition Plan #2 . The Kroger Co. adopts The Kroger Co. Tax Reform Transition Plan #2 as set forth in this document and the accompanying appendices. The Plan is effective as of July 27, 1989. The Tax Reform Transition Plan #2 is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. The Plan provides for retirement benefits that are lost under the Retirement Benefit Plan because Highly Compensated Employees are not allowed to accrue benefits under an interim TRA '86 benefit formula available to Employees who are not Highly Compensated Employees that takes into account revised pre-ERISA service counting rules.  

1-2


      (e) The Kroger Co. Tax Reform Transition Plan #3 . The Kroger Co. adopts The Kroger Co. Tax Reform Transition Plan #3 as set forth in this document and the accompanying appendices. The Plan is effective as of January 1, 1989. The Tax Reform Transition Plan #3 is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. The Plan provides for retirement benefits that are lost under the Retirement Benefit Plan because Highly Compensated Employees are denied retroactive benefit payment adjustments under the Retirement Benefit Plan in connection with TRA '86 amendments.

1.02 Participating Employers . The Supplemental Plans cover eligible Employees of the Company and of certain Participating Employers. See Appendix B for the special rules that apply to Participating Employers.

1.03 Plans for Exclusive Benefit of Employees . The Supplemental Plans are for the exclusive benefit of participating Employees and their spouses and dependents.

1-3


1.04 Rights of Employees Not Expanded . Neither the Supplemental Plans, nor the action of the Company in establishing or continuing the Plans, nor any action taken by the Plan Administrator, nor participation the Plans shall be construed as giving any person the right to be employed by the Company or, except as provided in the Plans, the right to any payment or benefit. All Employees shall be subject to discharge to the same extent as if the Supplemental Plans had never been adopted, and the Company expressly reserves the right to discharge any Employee without liability on the part of the Company or the Plan Administrator.

1.05 Governing Law and Savings Clause . The Supplemental Plans shall be governed by and construed according to the Code and other applicable federal law. To the extent not preempted by or inconsistent with federal law, the laws of the State of Ohio shall apply. If any provision of a Supplemental Plan is held invalid or unenforceable, the invalidity or unenforceability shall not affect any other provisions of the Plan, and the Plan shall be construed and enforced as if the provision had not been included.

1.06 Definitions and Plan Interpretations . The capitalized words and phrases used throughout this Plan document shall have the meanings set forth in Appendix A. Unless otherwise plainly required by the context, any gender may be construed to include all genders, and the singular or plural may be construed to include the plural or singular, respectively. The article and section headings in this Plan document have been inserted for the convenience of reference only and are not to be considered in the interpretation of the Supplemental Plans.

1-4


The appendices to this Plan document are an integral part of the Supplemental Plans and shall be given equal weight with the provisions in the main body of the document in the interpretation of the Plans. Unless otherwise expressly provided or plainly required by the context, all provisions of this Plan document and the accompanying appendices shall apply to each of the separate Supplemental Plans maintained under this Plan document.

1-5


ARTICLE II

PLAN PARTICIPATION ANDBENEFITS

2.01 Excess Benefit Plan . Each participant in the Retirement Benefit Plan whose benefits under the Retirement Benefit Plan are restricted by the limitations on benefits imposed by Section 415 of the Code shall be a Participant in the Excess Benefit Plan. As a Participant's Retirement Benefit Plan benefits become payable under the Retirement Benefit Plan, supplemental benefit payments under the Excess Benefit Plan shall become payable to the Participant or the Participant's Beneficiary. For each Retirement Benefit Plan payment made for a period beginning on or after January 1, 1989, the associated Excess Benefit Plan supplemental benefit payment shall equal the excess, if any, of what the benefit payment would have been under the Retirement Benefit Plan if the Participant's Retirement Benefit Plan benefits had not been restricted by the limitations on benefits imposed by Section 415 of the Code, over the actual benefit payment due under the Retirement Benefit Plan.

2.02 Section 401(a)(17) Supplemental Plan . Each participant in the Retirement Benefit Plan whose combined benefits under the Retirement Benefit Plan and the Excess Benefit Plan are restricted by the limitation on compensation which may be taken into account under the Retirement Benefit Plan imposed by Section 401 (a) (17) of the Code shall be a Participant in the Section 401 (a) (17) Supplemental Plan. As a Participant's Retirement Benefit Plan benefits become payable under the Retirement Benefit Plan, supplemental benefit payments under the Section 401(a)(17) Supplemental Plan shall become payable to the Participant or the Participant's Beneficiary.

2-1


For each Retirement Benefit Plan payment made for a period beginning on or after January 1, 1989, the associated Section 401(a) (17) Supplemental Plan supplemental benefit payment shall equal the excess, if any, of what the combined benefit payment would have been under the Retirement Benefit Plan and the Excess Benefit Plan if the Participant's combined benefit under these plans had not been restricted by the limitation on compensation which may be taken into account under the Retirement Benefit Plan imposed by Section 401(a)(17) of the Code, over the actual combined benefit payment due under the Retirement Benefit Plan and the Excess Benefit Plan.

2.03 Tax Reform Transition Plan #1 . Each Super Highly Compensated Employee participant in the Retirement Benefit Plan whose combined benefits under the Retirement Benefit Plan, the Excess Benefit Plan, and the Section 401(a)(17) Supplemental Plan are restricted because the participant is denied continued benefit accruals calculated in accordance with Article 20.02(a) of the Retirement Benefit Plan shall be a Participant in the Tax Reform Transition Plan #1. As a Participant's Retirement Benefit Plan benefits become payable under the Retirement Benefit Plan, supplemental benefit payments under the Tax Reform Transition Plan #1 shall become payable to the Participant or the Participant's Beneficiary. For each Retirement Benefit Plan payment made for a period beginning on or after January 1, 1989, the associated Tax Reform Transition Plan #1 supplemental benefit payment shall equal the excess, if any, of what the combined benefit payment would have been under the Retirement Benefit Plan, the Excess Benefit Plan, and the Section 401(a) (17) Supplemental Plan if the Participant had been entitled to continued benefit accruals calculated in accordance with Article 20.02(a) of the Retirement Benefit Plan, over the actual combined benefit payment due under the Retirement Benefit Plan, the Excess Benefit Plan, and the Section 401(a) (17) Supplemental Plan.

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2.04 Tax Reform Transition Plan #2 . Each Highly Compensated Employee participant in the Retirement Benefit Plan whose combined benefits' under the Retirement Benefit Plan, the Excess Benefit Plan, the Section 401(a)(17) Supplemental Plan, and the Tax Reform Transition Plan #1are restricted because the participant is denied benefit accruals calculated in accordance with Article 20.04(b) of the Retirement Benefit Plan shall be a Participant in the Tax Reform Transition Plan #2. As a Participant's Retirement Benefit Plan benefits become payable under the Retirement Benefit Plan, supplemental benefit payments under the Tax Reform Transition Plan #2 shall become payable to the Participant or the Participant’s Beneficiary. For each Retirement Benefit Plan payment made for a period beginning on or after July 27, 1989, the associated Tax Reform Transition Plan #2 supplemental benefit shall equal the excess, if any, of what the combined benefit payment would have been under the Retirement Benefit Plan, the Excess Benefit Plan, the Section 401(a)(17) Supplemental Plan, and the Tax Reform Transition Plan #1 if the Participant had been entitled to benefit accruals calculated in accordance with Article 20.04(b) of the Retirement Benefit Plan, over the actual combined benefit payment due under the Retirement Benefit Plan, the Excess Benefit Plan, the Section 401(a) (17) Supplemental Plan, and the Tax Reform Transition Plan #1.

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2.05 Tax Reform Transition Plan #3 . Each Highly Compensated Employee participant in the Retirement Benefit Plan whose combined benefit payments during the Tax Reform Transition Period, if any, under the Retirement Benefit Plan, the Excess Benefit Plan, the Section 401 (a)(17) Supplemental Plan, the Tax Reform Transition Plan #1, and the Tax Reform Transition Plan #2 are restricted because the participant is denied retroactive benefit payment adjustments under either or both of Articles 20.03 and 20.04(a) of the Retirement Benefit Plan shall be a Participant in the Tax Reform Transition Plan #3. A one-time retroactive supplemental benefit payment under the Tax Reform Transition Plan #3 shall be paid to the Participant or the Participant's Beneficiary after the Tax Reform Transition Period. The Participant's Tax Reform Transition Plan #3 supplemental benefit payment shall equal the excess, if any, of what the combined benefit payments for the Tax Reform Transition Period would have been under the Retirement Benefit Plan, the Excess Benefit Plan, and the Section 401 (a) (17) Supplemental Plan if the Retirement Benefit Plan's TRA '06 benefit formula had been adopted at the beginning of the Tax Reform Transition Period and payments had been made under the TIRA '86 benefit formula for the entire Tax Reform Transition Period, over the actual combined amount of benefit payments for the Tax Reform Transition Period due under the Retirement Benefit Plan, the Excess Benefit Plan, the Section 401(a) (17) Supplemental Plan, the Tax Reform Transition Plan #1, and the Tax Reform Transition Plan #2. If multiple individuals received payment of the Participant's Retirement Benefit Plan benefits during the Tax Reform Transition Period, the Section 401(a)(17) Supplemental Plan benefit shall be shared among them in proportion to the Participant's Retirement Benefit Plan benefits paid to them for the Tax Reform Transition Period.

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2.06 Participant Repayment of Duplicate Benefits . In accomplishing the purpose of the Supplemental Plans, the Company does not intend to pay any duplicate retirement benefits. If duplicate retirement benefits are paid to a Participant or the Participant's Beneficiary on account of a retroactive adjustment to benefit payments made from the Retirement Benefit Plan after payments have been made from the Supplemental Plans or for any other reason, the recipients of the duplicate benefits shall be obligated to repay to the Company the duplicate benefits paid under the Supplemental Plans upon receipt of notice from the Plan Administrator of the amount and cause of the duplicate benefits. The Plan Administrator's good faith determination of the amount of any duplicate benefits shall be binding upon all recipients of benefit payments under the Supplemental Plans.

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2.07 Benefits Under Each Plan Are Separate and Limited . Each Supplemental Plan is separate from the Retirement Benefit Plan and from the other Supplemental Plans maintained under this Plan document. Each Supplemental Plan provides solely the benefit amounts described for the Plan in this Article II. If benefits due under the Retirement Benefit Plan cannot be paid for any reason, including without limitation termination or insolvency of the Retirement Benefit Plan, the unpaid Retirement Benefit Plan benefits shall not be made up through additional payments from the Supplemental Plans. Similarly, if benefits due under one Supplemental Plan cannot be paid for any reason, the unpaid benefits under that Plan shall not be made up through additional payments from the other Supplemental Plans.

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ARTICLE III

PAYMENT OF BENEFITS

3.01 Timing and Manner of Payment . Benefits under a Supplemental Plan shall be paid at such times and in such manner as the Plan Administrator shall determine. The Plan Administrator may combine benefits from one or more of the Supplemental Plans for payment purposes. Generally, benefits under the Supplemental Plans will be paid on or about the same time the associated Retirement Benefit Plan benefits they are supplementing are paid under the Retirement Benefit Plan. Any benefits payable under the Tax Reform Transition Plan #3 will be paid after the end of the Tax Reform Transition Period. Benefits payable under the Tax Reform Transition Plan #2 will be paid retroactively to July 27, 1989. Benefits payable under the other Supplemental Retirement Plans will be paid retroactively to January 1, 1989. No adjustment in the amount of any benefit payment under a Supplemental Plan shall be made and no interest shall be due on account of the payment being made later than the payment of the associated Retirement Benefit Plan benefit.

3.02 Source of Payments . The Supplemental Plans shall be unfunded and all benefit payments under the Plans shall be made from the general assets of the Company, including at the sole option of the Company, from any assets held in any grantor trust established by the Company the assets of which are subject to the claims of the Company’s general, unsecured creditors in the event of the Company's Insolvency. No assets shall be irrevocably set aside to pay benefits under the Supplemental Plans in any manner making the assets unreachable by the Company's general, unsecured creditors in the event of the Company's Insolvency. Participants or any other recipients of benefits under the Supplemental Plans shall have no right to any specific assets of the Company by virtue of the existence or terms of the-Plans and shall be general, unsecured creditors of the Company at all times with respect to any claim for benefits under the Plans.

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3.03 Income Tax Withholding, Payroll Taxes, and Other Deductions. Payments under a Supplemental Plan shall be adjusted to appropriately reflect any applicable income tax withholding requirements, payroll taxes, or other deductions authorized by the Plan Administrator. A Participant shall be entitled to a reconciliation of the gross payments due under the Supplemental Plans with the net payments actually made.

3.04 Assignment or Alienation of Benefits .

      (a) General Rule . Except as expressly provided in this Plan document, no benefits under a Supplemental Plan shall be assigned or alienated.

      (b) Domestic Relations Orders . If a qualified domestic relations order applies to benefits payable under the Retirement Benefit Plan, but no related domestic relations order applies to benefits payable under a Supplemental Plan, benefits under the Supplemental Plan shall be determined and paid as though no qualified domestic relations order applied to benefits payable under the Retirement Benefit Plan. If a domestic relations order is received by the Plan Administrator that applies to benefits payable under a Supplemental Plan, the benefits payable under the Plan shall be paid to the alternate, payee or payees identified in the order. The timing and amount of benefits payable under the Supplemental Plan shall remain coordinated with benefit payments under the Retirement Benefit Plan and shall not be changed or disassociated from Retirement Benefit Plan benefits because of any domestic relations order.

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      (c) P rotective Action . In the event a Participant's benefits under a Supplemental Plan are garnished or attached by an order of any court other than by a domestic relations order, the Plan Administrator may bring an action for a declaratory judgment in a court of competent jurisdiction to have the order declared unenforceable against the Plan because of the general prohibition on the assignment or alienation of Plan benefits contained in this Section 3.04. During the pendency of the action, any benefits that become payable may be paid to the court for distribution by the court to the recipient that the court determines to be proper.

3.05 Payments to Legal Incompetents . Upon proof satisfactory to the Plan Administrator that any person entitled to receive a payment under a Supplemental Plan is legally incompetent to receive the payment, the Plan Administrator may direct the payment to be made to the guardian or conservator of the estate of the person.

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3.06 Discharge of Obligation; Receipt and Release . All payments under a Supplemental Plan made by the Company shall constitute a complete discharge of all obligations under the Plan of the Plan, the Company, and the Plan Administrator to the extent of the payments made. The Plan Administrator may require the payee, as a condition precedent to any payment, to execute a receipt and release in a form satisfactory to the Plan Administrator. The Plan Administrator may also require the recipient of any benefit payment under a Supplemental Plan, as a condition precedent to the payment, to execute an acknowledgment or agreement in a form satisfactory to the Plan Administrator concerning repayment of duplicate retirement benefits.

3.07 Correction of Mistakes . Any mistake in the amount of a Participant's benefits under the Supplemental Plans may be corrected by the Plan Administrator when the mistake is discovered. The mistake may be corrected in any reasonable manner authorized by the Plan Administrator (e.g., payments between the Participant and the Company or deduction of excess amounts paid to the Participant from future payments due to the Participant). In appropriate circumstances (e.g., where a mistake is not timely discovered), the Plan Administrator may waive the making of any correction.

3.08 Claim Procedures .

      (a) Written Claim is Not Required . A Participant need not file written claim for payment of benefits from the Supplemental Plans. commencement of a Participant's benefits under the Retirement Benefit Plan shall be sufficient basis for the Plan Administrator to commence a Participant's benefits under the Supplemental Plans.

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      (b) Written Claim May be Filed . If a Participant or Beneficiary does not receive payment of benefits under a Supplemental Plan which the Participant or Beneficiary believes are due under the Plan, the Participant or Beneficiary may file a written claim for benefits with the Plan Administrator. The written claim shall be in a form satisfactory to and with such supporting documents and information as may be required by the Plan Administrator.

      (c) Notice of a Claim Denial . If a claim for benefits under a Supplemental Plan is denied in whole or in part by the Plan Administrator, the claimant shall be notified in writing within a reasonable period of time following the denial. The notice shall set forth:

           (1) the reasons for the denial of the claim;

           (2) a reference to the provisions of the Plan on which the denial is based;

           (3) any additional material or information necessary to perfect the claim and an explanation why they are necessary; and

           (4) a reference to the procedures for review of the denial of the claim set forth in Section 3.08(d).

      (d) Right to a Review of the Denial . Every person whose claim for benefits under a Supplemental Plan is denied in whole or in part by the Plan Administrator shall have the right to request a review of the denial. A claim which has not been approved or denied by the Plan Administrator within 90 days of the date it was filed shall be de +ed to be denied and the claimant shall have the right to request a review of the denial. Review shall be granted if it is requested in writing by the claimant no later than 60 days after the claimant receives written notice of the denial. The review shall be conducted by the Plan Administrator.

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      (e) Decision on Review . With respect to any claim review hearing of the Plan Administrator, the claimant, in person or by duly authorized representative, shall have reasonable notice, shall have an opportunity to be present and be heard, may submit and review pertinent documents, and may submit a written statement. The Plan Administrator shall render its decision as soon as practicable. Ordinarily decisions shall be rendered within 60 days following receipt of the request for review. If the need to hold a hearing or special circumstances require additional processing time, the decision shall be rendered as soon as possible, but not later than 120 days following receipt of the request for review. The Plan Administrator's decision shall be in writing, shall set forth the reasons for the decision and the provisions of the Plan on which it is based, and shall be communicated to the claimant.

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The Plan Administrator's decision shall be final and binding on the claimant, and the claimant's heirs, assigns, administrator, executor, and any other person claiming through the claimant.

3-7


ARTICLE IV

PLAN AMENDMENT OR TERMINATION

4.01 Plan Amendment . The Company reserves the right at any time and from time to time to amend any or all of the Supplemental Plans. The Company may amend a Supplemental Plan in whole or in part, for any reason, and without the consent of any Employee, Participant, or other person- The Plan Administrator shall have the power to amend each Supplemental Plan to the same extent as the Company, except that the Plan Administrator shall not have the power to amend this Section 4.01.

4.02 Plan Termination . The Company reserves the right at any time to terminate or partially terminate a Supplemental Plan. The Company may terminate a Supplemental Plan in whole or in part, for any reason, and without the consent of any Employee, Participant, or other person. The Plan Administrator shall have the power to terminate a Supplemental Plan to the same extent as the Company.

4.03 Preservation of Combined Accrued Benefit . No amendment or termination of any of the Supplemental Plans shall deprive a Participant of any portion of the Participant's combined accrued benefit under the Retirement Benefit Plan and the Supplemental Plans as of the date of the amendment or termination of the Supplemental Plan.

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Combined benefits payable under the Retirement Benefit Plan and the Supplemental Plans shall not decrease after the amendment or termination of a Supplemental Plan on account of the amendment or termination, however, the portion of the protected combined accrued benefit payable under a particular Supplemental Plan may decrease over time due to increases in benefit accruals under the Retirement Benefit Plan or increases in benefits provided by the other Supplemental Plans.

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ARTICLE V

PLAN ADMINISTRATION

5.01 Company Actions . Whenever the Company is required or permitted to take any action under the terms of a Supplemental Plan, it may be taken by any duly authorized officer of the Company.

5.02 Powers and Duties of the Plan Administrator

      (a) Identity of the Plan Administrator . The Retirement Management Committee of the Company shall be the Plan Administrator of each Supplemental Plan. Members of the Retirement Management Committee may be Employees or Participants and shall be appointed from time to time by and serve at the pleasure of the Chief Executive Officer of the Company. Members of the Retirement Management Committee shall serve without compensation. If a Retirement Management Committee is not appointed, or if no members are in office, the Company shall have all the powers and duties of the Plan Administrator unless the Company designates another person to have these powers and duties.

      (b) Actions of the Plan Administrator .

           (1) The Plan Administrator shall establish its own procedures, adopt any regulations it. deems desirable for the conduct of its affairs, set the time and place for its meetings, and provide for the keeping of minutes of all meetings and actions taken. Copies of the minutes shall be available to the Company. The Plan Administrator shall report to the Company from time to time in its discretion or as directed by the Company.

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           (2) A majority of the members of the Retirement Management Committee shall constitute a quorum for the transaction of business by the Plan Administrator and any action of the Plan Administrator may be taken at a meeting, or without a meeting by written consent or by polling of members, upon the affirmative vote of a majority of the members of the Retirement Management Committee. However, no member of the Retirement Management Committee shall be entitled to vote on or decide any matter relating solely to the member or any of the member's rights or benefits under a Supplemental Plan.

      (c) Committee Officers and Agents . The Plan Administrator may appoint officers, including a secretary who need not be a member of the Retirement Management Committee. The Plan Administrator may appoint sub-committees, may authorize one or more members or any agent to execute or deliver any instrument on its behalf, and may employ agents, counsel (which may be counsel for the Company), and other professional advisers for purposes of a Supplemental Plan. The Plan Administrator may delegate to any agent, sub-committee, or member any of its rights or duties with respect to the administration of a Supplemental Plan, and the authority to perform any act for the Plan Administrator, including without limitation those matters involving the exercise of discretion, provided that the delegation shall be subject to revocation at any time by the Plan Administrator. Any delegation shall be reviewed at least annually by the Plan Administrator.

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      (d) General Powers and Duties of the Plan Administrator . The Plan Administrator shall be responsible for each Supplemental Plan's operation and administration, including but not limited to complying with reporting and disclosure requirements and maintaining Plan records. Except as to the power and authority expressly reserved to the Company, the Plan Administrator shall possess and may exercise all power and authority with respect to the control, management, operation, and administration of a Supplemental Plan. The Plan Administrator may amend or terminate a Supplemental Plan as provided in Article IV. The Plan Administrator may adopt rules for the administration of a Supplemental Plan, provided the rules do not conflict with applicable law or the express provisions of the Plan. The Plan Administrator may take any other or additional actions that are permitted under ERISA, the Code, or Treasury or Department of Labor regulations or rulings, that the Plan Administrator determines to be necessary or appropriate to accomplish the purposes of a Supplemental Plan. The Plan Administrator shall keep adequate records of its administration of each Supplemental Plan.

      (e) Plan Interpretation and Benefit Eligibility . The Plan Administrator shall have the authority to construe the terms of each Supplemental Plan, including the authority to remedy any omissions, ambiguities, or inconsistencies in the provisions of a Plan, and to resolve all questions arising under a Plan or in the administration of a Plan. The Plan Administrator shall have the authority to determine eligibility to participate in each Supplemental Plan and eligibility for benefits, including the proper amount of benefits, under each Plan. The Plan Administrator's decision or action concerning any of the above shall be conclusive and binding upon all Participants and their beneficiaries, heirs, assigns, administrators, executors, and any other person claiming through them.

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5.03 Reliance . The Company and the Plan Administrator shall be entitled to rely upon all tables, valuations, certificates, opinions, reports, and other materials which are furnished by an accountant, actuary, auditor, counsel, insurance company, or other expert who is engaged by the Company or the Plan Administrator unless they know that the materials are false or in error.

5.04 Exoneration and Indemnification of Certain Individuals .

      (a) Exoneration . In the absence of fraud or bad faith, no individual who is a member or officer of the Retirement Management Committee serving as Plan Administrator or officer or employee of the Company, to whom any power or duty relating to the administration or interpretation of a Supplemental Plan may be delegated or allocated, shall be personally liable to the Company, to a Participating Employer, or to any Participants or their beneficiaries, heirs, administrators, executors, and assigns, or to anyone else, by reason of the exercise or non-exercise of any power vested in the individual under the Plan or applicable law, or by reason of any action taken or omitted, or mistake of judgment made, by the individual in good faith or, without limiting the generality of the foregoing, by reason of any contract or other instrument executed by the individual or on the individual's behalf in the individual's official capacity under the Plan or by reason of any act or omission on the part of any other person in connection with the Plan.

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      (b) Indemnification . To the maximum extent permitted by law, the Company shall indemnify and hold harmless, directly from the Company's assets (including the proceeds of any insurance policy the premiums of which are paid from the Company's, a Participating Employer's, or a Related Employer's assets) each individual who is a member or officer of the Retirement Management Committee serving as Plan Administrator, or officer or employee of the Company to whom any power or duty relating to the administration or interpretation of a Supplemental Plan may be delegated or allocated, against any cost or expense (including reasonable counsel fees) or liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission of the individual or of any other person in connection with the Plan unless arising out of the individual's own fraud or bad faith.

5.05 Communications With Participants About a Plan.

      (a) Communications to Participants . All notices, statements, reports, and other communications concerning a Supplemental Plan from the Company or the Plan Administrator to any Employee, Participant, or other person required or permitted under the Plan shall be deemed to have been duly given to the person:

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           (1) when posted, if posting is used to notify a class of similarly situated persons;

           (2) when delivered to the person; or

           (3) when mailed by first-class mail or its equivalent, postage prepaid and addressed to the person at the address of the person most recently appearing on the records of the Plan Administrator.

      (b) Communications from Participants . All elections, designations, requests, notices, instructions, and other communications from a Participant or other person to the Company or the Plan Administrator required or permitted under a Supplemental Plan shall be in a form prescribed by or acceptable to the Company or the Plan Administrator, shall be mailed by first-class mail (or its equivalent) or delivered in person to the Company or the Plan Administrator, and shall be deemed to have been given and delivered only upon actual receipt by the Company or the Plan Administrator.

      (c) Participant Access to Plan Records , A Participant shall have access to a Supplemental Plan's documents and the portion of a Supplemental Plan's records directly relating to the Participant's Plan benefits but shall have no right to inspect Plan records generally or as they relate to the Plan benefits of other Participants.

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5.06 Payment of Plan Expenses . The Company shall pay all expenses of establishing and administering the Supplemental Plans.

5.07 Plan’s Agent for Service of Legal Process . The Secretary of the Company or any other person designated by the Company and communicated to the participants shall be a Supplemental Plan's agent for service of legal process.

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ARTICLE VI

ADOPTION OF THE PLANS

6.01 Company Review and Approval of the Plan Document . This plan document, including the accompanying Appendices labeled A and B, has been reviewed and approved by the Company.

6.02 Execution of the Plan Document . In witness of the foregoing, this plan document has been executed on behalf of the Company by the undersigned duly authorized officer of the Company.

      THE KROGER CO.  
 
 
Attest          /s/Norma Skoog     By     /s/Lorrence T. Kellar  
    Norma Skoog, Secretary         Lorrence T. Kellar  
Date     August 6, 1990   Its     Group Vice President  


THE KROGER CO.
SUPPLEMENTAL RETIREMENT PLANS
FOR CERTAIN RETIREMENT BENEFIT PLAN PARTICPANTS

APPENDIX A

GLOSSARY

      Beneficiary ” shall mean the person or persons, if any and including without limitation the Participant’s surviving spouse or estate, receiving payment of the Participant’s Retirement Benefit Plan benefits after the death Of the Participant in accordance with the terms of the Retirement Benefit Plan.

      Code ” shall mean the internal Revenue Code of 1986, as amended, or any successor or substitute provisions of law in force.

      Company ” shall mean The Kroger Co. or any successor which assumes a Supplemental Plan. To the extent provided in Section B.02 of Appendix B, Company may also refer to a Participating Employer with regard to the Participating Employer’s participation in a Supplemental Plan.

      Employee ” shall mean any person who the Company determines is in the employ of the Company as a common-law employee. An independent contractor shall not be considered an Employee on account of rendering services to the Company in the capacity of an independent contractor. The term Employee does not include Leased Employees.

      ERISA " shall mean the Employee Retirement Income Security Act of 1974 as amended, or any successor or substitute provisions of law in force.

      " Excess Benefit Plan " shall mean The Kroger Co. Excess Benefit Plan as in force from time to time. The Plan as amended and restated as of January 1, 1989 is set forth in this Plan document, including the accompanying appendices.

      " Highly Compensated Employee " shall mean a highly compensated employee within the meaning of Section 414(q) of the Code.

      Insolvency " shall mean an excess of liabilities over assets as determined in accordance with generally accepted accounting principles.

A-1


      Leased Employee ” shall mean any person treated as a leased employee of the Company under Section 414(n) of the Code and the regulations under that Section.

      Participant ” shall mean a participant in the Retirement Benefit Plan who participates in a Supplemental Plan in accordance with Article II. Participation in the Retirement Plan does not make an individual a Participant in a Supplemental Plan unless the individual meets the Plan’s participation requirements set forth in Article II. An individual may be a Participant in one or more of the Supplemental Plans. An individual’s participation in on Supplemental Plan does not make the individual a Participant in any other Supplemental Plan

      Participating Employer ” shall mean any Related Employer or other affiliate of the Company participating in a Supplemental Plan as provided in Section B.01 of Appendix B. Participating Employer may refer to all Participating Employers collectively or to each one individually as the context may require. Participating Employers are subject to the special rules descried in Section B.02 of Appendix B. See these rules for the extent to which the term “Company” in the Plan document refers to Participating Employers.

      Plan ” or “ Plans ” shall have the meaning set forth in the definition of Supplemental Plan or Supplemental Plans below.

      Plan Administrator ” shall mean the Retirement Management Committee appointed by the Chief Executive Officer of the Company pursuant to Section 5.02 to administer the Supplemental Plans and to perform the duties described in Section 5.02, or if no Committee is appointed or there are no members in office, the Company or another person designated by the Company.

      Plan Year ” shall mean the Company’s 52-53 week fiscal year.

      Related Employer ” shall mean a corporation or other business organization during the period it is—

      (a) a member with the Company of a controlled group of corporations under Section 414(b) of the Code;

      (b) a member with the Company of a group of trades or business under common control under Section 414(c) of the Code;

      (c) a member with the Company of an affiliated service group under Section 414(m) of the Code;

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      (d) a leasing organization with respect to the Company under section 414(n) of the Code, but only if and to the extent required in regulations under Section 414(n)® or

      (e) required to be aggregated with the Company under Section 414(o) of the Code.

      Retirement Benefit Plan ” shall mean the Kroger Retirement Benefit Plan as in force from time to time. References to Articles 20.02 and 20.03 of the Retirement Benefit Plan refer respectively to the Article 20.02 added b the First Amendment to the Retirement Benefit Plan (As In Effect December 31, 1998) and to the Article 20.03 added by the Second Amendment to the Retirement Benefit Plan (As In Effect December 31, 1988).

      Retirement Management Committee ” shall mean the committee of this name appointed by the Chief Executive Officer of the Company.

      Section 401(a)(17) Supplemental Plan ” shall mean The Kroger Co. Section 401(a)(17) Supplemental Plan as in force from time to time. The Plan is set forth in this Plan document, including the accompanying appendices.

      Super Highly Compensated Employee ” shall mean a highly compensated employee within the meaning of Section 414(q)(1) (A) or (B) of the Code. A Retirement Benefit Plan participant who is a Super Highly Compensated Employee for a plan year to which Article 20.02 of The Retirement Benefit Plan applies shall be treated a s a Super Highly Compensated Employee for subsequent plan years to which Article 20.02 applies.

      Supplemental Plan ” or “ Supplemental Plans ” shall mean the supplemental retirement plans maintained under this Plan document as listed in Section 1.01. Supplemental Plan or Plans may refer to all of these supplemental retirement plans collectively, to a particular subgroup of the plans, or to an individual plan as the context may require. Each supplemental retirement plan maintained under this Plan document is a separate and independent plan.

      Tax Reform Transition Period ” shall mean the period from January 1, 1989 to the date benefit payments to Highly Compensated Employees under the Retirement Benefit Plan generally begin to include TRA ’86 amendment amounts.

A-3


      Tax Reform Transition Plan #1 ” shall mean The Kroger Co. Tax Reform Transition Plan #1 as in force from time to time. The Plan is set forth in this Plan document, including the accompanying appendices.

      Tax Reform Transition Plan #2 ” shall mean The Kroger Co. Tax Reform Transition Plan #2 as in force from time to time. The Plan is set forth in this Plan document, including the accompanying appendices.

      Tax Reform Transition Plan #3 ” shall mean The Kroger Co. Tax Reform Transition Plan #3 as in force from time to time. The Plan is set forth in this Plan document, including the accompanying appendices.

      TRA ‘86 ” shall mean those qualification requirements described in Income Tax Regulations section 1.401(b)-1(b)(2)(ii).

A-4


THE KROGER CO.
SUPPLEMENTAL RETIREMENT PLANS
FOR CERTAIN RETIREMENT BENEFIT PLAN PARTICIPANTS

APPENDIX B

PARTICIPATING EMPLOYERS

            Page  
B.0l Adoption of the Plan by Participating Employers     B-1  
    (a)        Procedure         B-1  
        (b)     Variation in Plan Provisions     B-2  
 
B.02   Rules for Participating Employers     B-2  
    (a)   Meaning of “Company”       B-2  
      (b)   Employee Eligibility and Participation       B-2  
    (c)   Plan Benefits         B-3  
      (d)   Plan Expenses         B-3  
    (e)   Plan Amendment or Termination     B-4  
    (f)   Plan Administration       B-5  
    (g)   Exoneration and Indemnification of the Company     B-6  
    (1 )   Exoneration       B-6
    (2 )   Indemnification       B-6  
 
B.03   Termination of Participation       B-8  
  (a)   By the Company         B-8  
  (b)   By a Participating Employer.     B-8  
  (c)   Effect of Termination of Participation     B-8  
 
 
*   *   *

B.01 Adoption of the Plans by Participating Employers .

      (a) Procedure . With the consent of the Company or the Plan Administrator, a Related Employer or other affiliate of the Company may become a Participating Employer under a Supplemental Plan by appropriate action of the affiliate's board of directors, other governing body, or duly authorized officer. The Plan Administrator shall keep a list of all Participating Employers. A Participating Employer's participation in a Supplemental Plan may be documented by a participation agreement prescribed by or acceptable to the Company or the Plan Administrator.

B-l


      (b) Variation in Plan Provisions . With the consent of the Company or the Plan Administrator, a Participating Employer may vary certain of the provisions of a Supplemental Plan ( e.g. , eligibility) as they relate to Employees of the Participating Employer. Any variance shall be reflected in a participation agreement with the Participating Employer.

B.02 Rules for Participating Employers .

      (a) Meaning of "Company" . When used in this Appendix B, "Company" shall refer solely to The Kroger Co. or any successor which assumes a Supplemental Plan. When used in the remainder of the Plan document, "Company" shall also refer solely to The Kroger Co. or any successor which assumes a Supplemental Plan if plainly required by the context, or if so provided in this Section B.02 (e.g., in the provisions of subsection (e) concerning Plan amendment or termination and subsection (f) concerning Plan administration). Otherwise, when used in the remainder of the Plan document, "Company" may also refer to a Participating Employer, mutatis mutandis, as regards the Participating Employer’s participation in a Supplemental Plan.

      (b) Employee Eligibility and Participation . Eligibility and participation for Employees of a Participating Employer shall be determined in accordance with the provisions of Article II and any rules of the Plan Administrator concerning determinations of eligibility and participation. Generally, service with the Company and all Participating Employers shall be considered for eligibility purposes as though the Company and Participating Employers were a single employer.

B-2


      (c) Plan Benefits . Benefits for Participants of a Participating Employer shall be determined and provided in accordance with Articles II and III, as modified by any participation agreement of the Participating Employer, and in accordance with any rules of the Plan Administrator concerning the determination and provision of benefits. Supplemental Plan benefits for the Participants of a Participating Employer shall be unfunded benefits payable solely from the general assets of the Participating Employer. If the Company or another person advances funds to pay benefits for the Participants of a Participating Employer, the Participating Employer shall reimburse the amount of the advance to the Company or other person immediately upon request.

      (d) Plan Expenses . Upon the request of the Company or the Plan Administrator, each Participating Employer shall pay its share of the cost of any necessary or appropriate expenses incurred by the Company, the Plan Administrator" or their agents in the administration of a Supplemental Plan. A Participating Employer's share of any cost for a Plan Year shall be determined on the basis of the Participating Employer's proportionate share of the total Participants in the Plan for the Plan Year unless the Company or the Plan Administrator, from time to time or with respect to particular expenses, determines that another reasonable basis of allocation shall apply. The Company or the Plan Administrator may charge identifiable costs incurred solely for the Participants of a Participating Employer to that Participating Employer.

B-3


      (e) Plan Amendment or Termination .

           (1) The Company or the Plan Administrator may amend or terminate a Supplemental Plan as provided in Article IV with respect to the Company's Participants and the Participants of Participating Employers, provided that any Participating Employer may terminate participation in a Supplemental Plan under Section B.03 within 30 days after notification of an amendment or termination affecting its Participants without the amendment or termination becoming effective as to its Participants. If timely termination of participation is not made by a Participating Employer, the amendment or termination shall apply to the Participants of the Participating Employer. A Participating Employer may waive its 30 day notification period.

           (2) With the consent of the Company, a Participating Employer may amend or terminate a Supplemental Plan as provided in Article IV with respect to its Participants. amendment shall be reflected in an amended participation agreement. An amendment or termination by a Participating Employer shall not apply to or affect the Participants of the Company or other Participating Employers unless, with the consent of the Company, the amendment or termination is also adopted by them. If a Participating Employer purports to amend or terminate a Supplemental Plan without the consent of the Company, the amendment or termination shall not be effective and the Company may terminate the Participating Employer's participation in the Plan pursuant to Section B.03, or may take whatever alternative action the Company decides is appropriate under the circumstances.

B-4


      (f) Plan Administration .

           (1) The Company, or persons to whom it has delegated its authority, shall appoint the Retirement Management Committee serving as Plan Administrator.

           (2) Participation in a Supplemental Plan by a Participating Employer shall constitute an appointment of the Company and the Plan Administrator as the Participating Employer's exclusive agents to exercise on the Participating Employer's behalf all of the power and authority conferred by the Plan or by other applicable law upon the Company and the Plan Administrator. This appointment shall continue until participation in the Plan is terminated as to the Participating Employer in accordance with Section B.03.

           (3) The Company and the Plan Administrator shall have the authority to make any necessary or appropriate rules concerning the participation of Participating Employers in a Supplemental Plan, and these rules shall be binding upon all persons, including without limitation Participating Employers, Employees, and Participants. The Company and the Plan Administrator may delegate some or all of their powers and duties as they relate to the Participants of a Participating Employer to the Participating Employer, or to an agent appointed by the Participating Employer. Any delegation may be revoked by the Company or the Plan Administrator at any time with or without cause. Unless a delegation is in force, a Participating Employer shall have only the power and duties expressly set forth in the Plan for the Participating Employer and shall have none of the powers and duties expressly set forth in the Plan for the Company or for the Plan Administrator.

B-5


      (g) Exoneration and Indemnification of the Company ,

           (1) Exoneration . In the absence of fraud or bad faith, the Company and its directors, officers, employees, and agents shall not be liable to a Participating Employer, or to any Participants or their beneficiaries, heirs, administrators, executors, and assigns, or to anyone else, by reason of the exercise or non-exercise of any power vested in the Company or the Plan Administrator under a Supplemental Plan or applicable law, or by reason of any action taken or omitted, or mistake of judgment made, by them in good faith, or, without limiting the generality of the foregoing, by reason of any contract or other instrument executed by them, on their behalf, or by their agent.

           (2) Indemnification . Participation in a Supplemental Plan by a Participating Employer shall constitute an irrevocable agreement by the Participating Employer to indemnify and hold harmless the company as provided in this Section B.02(g)(2). This indemnification agreement shall survive any termination of participation in the Plan by the Participating Employer, whether the termination is caused by action of the Company or by action of the Participating Employer.

B-6


                (A) To the maximum extent permitted by law, the Participating Employer shall indemnify and hold harmless the Company and its directors, officers, employees, and agents against any cost or expense (including counsel fees) or liability (including any sum paid in settlement of a claim in the discretion of the company) arising in connection with the participation of the Participating Employer in a Supplemental Plan, including without limitation any cost or expense or liability arising out of any act or omission on the part of the Company or its directors, officers, employees, or agents in connection with the participation of the Participating Employer in the Plan unless arising out of their own fraud or bad faith.

                (B) To the maximum extent permitted by law, and without limiting the generality of subsection(g) (2) (A) above, the Participating Employer shall indemnify and hold harmless the Company against the cost and expense of any indemnification payments made by the Company under Section 5.04 to individuals having powers or duties with respect to a Supplemental Plan that are not paid or reimbursed by proceeds from an insurance policy and that arise out of any act or omission of the individuals in connection with the participation of the Participating Employer in the Plan.

B-7


B.03 Termination of Participation .

      (a) By the Company . With or without cause, the Company or the Plan Administrator may terminate the participation in a Supplemental Plan of any Participating Employer by written notice to the Participating Employer.

      (b) By Participating Employer . Any Participating Employer may voluntarily terminate its participation in a Supplemental Plan by written notice to the Company or the Plan Administrator.

      (c) Effect of Termination of Participation. A termination of a Participating Employer's participation in a Supplemental Plan shall not affect the continuing participation in the Plan of the Company and other Participating Employers. Following termination of a Participating Employer's participation in a Plan, the Participants of the terminating Participating Employer shall be treated as though the Plan were terminated with respect to them. A terminating Participating Employer may adopt its own separate supplemental retirement plan to replace the Plan and to continue supplemental retirement plan benefits for its employees.

B-8


EXHIBIT 10.9

This document constitutes part of a prospectus covering securities that have been
registered under the Securities Act of 1933.
The date of this document is <Date of Grant>.

THE KROGER CO.
RESTRICTED STOCK AGREEMENT

Pursuant to a Long-Term Incentive Plan (the “Plan”), The Kroger Co. (“we” or “us”) hereby grants <Number of Shares Granted> shares of
restricted stock (the “shares”) to the undersigned grantee (“you”) on <Date of Grant> (the “grant date”).

     1. The shares will be issued in your name, or in the name of an agent or plan administrator on your behalf, but will be held by us. The shares will be subject to, and any certificate issued to evidence the shares will bear, the following legend:

“This certificate and the shares of stock represented hereby are subject to the terms and conditions (including the risks of forfeiture and restrictions against transfer) contained in a Long-Term Incentive Plan of The Kroger Co. and an Agreement entered into between the Plan participant and The Kroger Co. Release from such terms and conditions will be made only in accordance with the provisions of the Plan and the Agreement, a copy of each of which is on file in the office of the Secretary of The Kroger Co. or The Kroger Co.’s plan administrator.”

     2. Neither the shares, the right to vote the shares or the right to receive dividends thereon may be sold, assigned, transferred, pledged, hypothecated or otherwise transferred or encumbered by you during the restricted period. You will have all the other rights of a shareholder. Dividends on the restricted shares will be treated as compensation for tax purposes, unless a Section 83(b) election is made in which case they will be treated as dividends for tax purposes, but in either case will not be considered as earnings for purposes of calculating retirement benefits.

      3. Unless and until the restrictions on the shares lapse, the shares will be forfeited by you if your employment by us ceases for any reason other than death or disability, as determined by the Committee as defined in the Plan, or upon a “Change in Control” as defined below. At the time of such death, disability or Change in Control, the restrictions will lapse, the shares no longer will be subject to the restrictions, and any new certificates issued to you or the your legal representative for all shares theretofore subject to risk of forfeiture will be free of the foregoing legend.


     4. For purposes of this Agreement, a “Change of Control” will be deemed to have occurred when:

     a.      without prior approval of our Board of Directors, any person, group, entity or group thereof becomes the owner of, or obtains the right to acquire, 20% or more of the voting power of our then outstanding voting securities; or
 
b.

a tender or exchange offer has expired, other than an offer by us, pursuant to which 20% or more of the our then outstanding voting securities have been purchases; or

 
c. as a result of, or in connection with, or within two years following (i) a merger or business combination, (ii) a reorganization, or (iii) a proxy contest, in any case which was not approved by our Board of Directors, the individuals who were our directors immediately before the transaction cease to constitute at least a majority thereof, except for changes caused by death, disability or normal retirement; or
 
d. our shareholders have approved (i) an agreement to merge or consolidate with or into another corporation and we are not the surviving corporation or (ii) an agreement, including a plan of liquidation, to sell or otherwise dispose of all or substantially all of our assets.

     5. The restrictions will lapse on the later to occur of (i) the date on which you formally accept this Agreement in the manner that we advise you in writing, and (ii) the passage of the period of time, known as the vesting period, as follows:

Annual Anniversary of Date of Grant

You Are Vested In:

After the restrictions have lapsed, the shares thereafter no longer will be subject to the restrictions, and any new certificate issued to you or your representative will be free of the foregoing legend.

     6. For purposes of this agreement, the fair market value of a share of common stock is the amount determined pursuant to a reasonable method adopted by the Committee. If no sales are made on that date, Committee will use the most recent prior date for which sales are reported.

     7. You or your representative will be responsible to satisfy all tax obligations, if any, prior to the lapsing of the restrictions. If you or your representative do not satisfy those obligations through a cash payment to our stock option administrator or as we otherwise direct, on or before the date on which the restrictions lapse, we are authorized and directed to retain that number of shares with a fair market value, as defined in the prospectus for the Plan and this agreement, equal to the tax obligations due, on the date of the release. You or your representative will remain liable for any tax obligations remaining in excess of the amounts so withheld.

     8. Any shares to be issued under this Agreement, at our election, may be issued in certificate form or may be maintained in book-entry form and not represented by a certificate. Shares may be issued directly in your name or in the name of a designated agent or plan administrator on your behalf.


The parties have executed this agreement on the date of grant set forth above.

The Kroger Co.
 
 
By         
          David B. Dillon  
 
 
(“you”)
 
 
     
<Participant Name>


EXHIBIT 10.10

This document constitutes part of a prospectus covering securities that have been
registered under the Securities Act of 1933.

The date of this document is <Date of Grant>.

     The Kroger Co., an Ohio corporation with its principal place of business at Cincinnati, Ohio, (“we” or “us”) has adopted a Long-Term Incentive Plan for employees and directors of Kroger and its subsidiaries ("Kroger"). The plan is administered by the Committee as defined in the plan. The Committee determines the employees and directors who are granted awards and the types and amounts of awards.

     The plan provides that the terms of grants are determined by Committee and will be set forth in this agreement.

     The Committee has decided to grant nonqualified stock options to purchase <Number of Shares Granted> shares of Kroger common stock to <Name of Participant> (“you”) on the date of this document (the “date of grant”).

     In consideration of the services you have provided and that you will provide, we grant you the option to purchase shares of common stock of Kroger, subject to the terms of the plan and the following specific terms and conditions:

     1. The option price of $<Grant Price> is the Fair Market Value of a share of Kroger common stock on the date of grant of the option. Fair Market Value for purposes of establishing the option price is the closing price of Kroger common stock reported on the date of grant on the New York Stock Exchange. For all other purposes, Fair Market Value of a share of common stock is the amount determined pursuant to a reasonable method adopted by the Committee. If no sales are made on that date, the Committee will use the most recent prior date for which sales are reported.

     2. Except as otherwise provided in Paragraph 7 or Paragraph 8 below, you have no right to exercise any part of this option until the later of (i) your formal acceptance of this agreement in the manner that we have advised you in writing, and (ii) the passage of the period of time, known as the vesting period, as follows:

Annual Anniversary of Date of Grant

You Are Vested In : Expiration Date

If your employment by or service to Kroger is terminated prior to this option becoming exercisable, other than as set forth in Paragraph 7, all rights under this Agreement will terminate.


     3. You cannot transfer this option except by will or the laws of descent and distribution. It is exercisable, during your lifetime, only by you, or, in the event of legal disability, by your legal representative.

     4. You are entitled to the privileges of stock ownership only as to those shares of stock actually purchased by you under this Agreement.

     5. If you want to exercise all or any part of this option, you must make the election in writing. You must deliver your notice of election, this agreement, and cash payment for your shares to: Stock Option Administrator, The Kroger Co., 1014 Vine Street, Cincinnati, Ohio 45202. The Committee can establish any other place or method for delivery of stock option exercises, including electronic means directly with us or our designated administrator. We will notify you in advance of any alternate place or method of delivery of stock option exercises. No shares will be delivered to you until the full option price per share for the number of shares then exercised is paid. If any shares under this agreement remain outstanding after exercise, we will make appropriate notations and return this agreement to you. In addition to cash, you may pay the exercise price by delivering shares of common stock of Kroger, fully endorsed and containing a signature guaranty. Any shares delivered by you will be valued at the Fair Market Value, as described in Paragraph 1 of this agreement, on the date of exercise of the option. You must have owned those shares for at least six months. The Committee can increase this required holding period for up to two years. Under certain circumstances, unless prohibited by law, you also can elect to have a portion of the shares issuable upon exercise sold in order to satisfy the exercise price and any taxes that must be withheld. You can obtain information on how to accomplish this, along with other forms of cashless exercise, from your human resources office.

     6. You must pay all withholding tax or liabilities prior to issuance of shares.

     7. Except as otherwise provided in paragraph 13, if your employment by or service to Kroger terminates after reaching age 55 with at least five years of service at Kroger, your options will continue to vest as shown in paragraph 2 of this agreement and you will be permitted to exercise your option throughout the remaining term. If you die or become disabled, as determined by us, your option will become exercisable and your personal representative will be permitted to exercise your option throughout the remaining term. If you leave Kroger’s employ for any other reason, this option expires. If any portion of the option is exercisable prior to that expiration, you or your personal representative have one year or the remainder of the ten year term, whichever is shorter, to exercise the option.

     8. This option becomes immediately exercisable in full, but not in part, if at any time after the date of this Agreement any of the following occur:

     a.      without prior approval of our Board of Directors, any person, group, entity or group thereof, excluding our employee benefit plans, becomes the owner of, or obtains the right to acquire, 20% or more of the voting power of our then outstanding voting securities; or
 
b.

a tender or exchange offer has expired, other than an offer by us, under which 20% or more of our then outstanding voting securities have been purchased; or




     c.      as a result of, or in connection with, or within two years following (i) a merger or business combination, (ii) a reorganization, or (iii) a proxy contest, in any case which was not approved by our Board of Directors, the individuals who were directors of Kroger immediately before the transaction cease to constitute at least a majority thereof, except for changes caused by death, disability or normal retirement; or
 
d.

Our shareholders have approved (i) an agreement to merge or consolidate with or into another corporation and Kroger is not the surviving corporation or (ii) an agreement, including a plan of liquidation, to sell or otherwise dispose of all or substantially all of our assets.

     9. This Agreement does not give you any right of continued employment by or to continue to provide service to Kroger. It does not affect your right or Kroger’s right, to terminate your employment or service at any time.

     10. In the event of any stock splits, stock dividends, or reverse stock splits, the number of shares and the price per share set forth in this Agreement will be adjusted proportionately.

     11. Unless sooner terminated under one or more of the terms and conditions in this Agreement, this option will remain in force for a term of ten years from the date of this Agreement, and it must be exercised by the holder on or before that date. In the event that the option expires on a day that is not a business day, it must be exercised on or before the last business day prior to the expiration date.

     12. The option evidenced by this Agreement and the exercise of the option are subject to the terms and conditions of the Plan. This option is subject to any rules and regulations adopted by the Committee.

     13. Notwithstanding anything contained in paragraph 7 to the contrary, in the event that while this agreement is outstanding you provide services as an employee, director, consultant, agent, or otherwise, to any of Kroger’s competitors, this option expires. If any portion of the option is exercisable prior to that expiration, you or your personal representative have one year or the remainder of the ten year term, whichever is shorter, to exercise the option.

          For purposes of this paragraph 13, a competitor is any business that sells groceries, food, drugs, health and beauty care items, motor fuels, or pharmaceuticals, at retail in one or more of the same geographic areas that Kroger sells those products.

     14. This agreement is governed by the laws of the state of Ohio.


The parties have executed this agreement on the date of grant set forth above.

The Kroger Co.
 
 
By         
          David B. Dillon  
 
 
(“you”)
 
 
     
<Participant’s Name>


EXHIBIT 12.1

SCHEDULE OF COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES FOR THE KROGER CO. AND
CONSOLIDATED SUBSIDIARY COMPANIES FOR THE FIVE FISCAL YEARS ENDED FEBRUARY 3, 2007

  February 3, January 28, January 29, January 31, February 1,
  2007 2006 2005 2004 2003
      (53 weeks)     (52 weeks)     (52 weeks)     (52 weeks)     (52 weeks)
Earnings:  
Earnings before tax expense (1)     $ 1,748     $ 1,525     $ 286     $ 739     $ 1,950
Fixed charges (1)   870 895 950 983 1,000
Capitalized interest     (13 )   (7 )   (5 )   (5 )   (5 )
 
  $ 2,605   $ 2,413   $ 1,231   $ 1,717   $ 2,945  
 
Fixed charges:  
Interest (1)   $ 501 $ 518 $ 562 $ 609 $ 624
Portion of rental Payments deemed to be interest     370     377     388     374     376  
 
  $ 871   $ 895   $ 950   $ 983   $ 1,000  
 
Ratio of earnings to fixed charges (1)     3.0     2.7     1.3     1.7     2.9  

(1)       Amounts have been adjusted for the Company’s adoption of SFAS No. 145 on February 2, 2003. Adoption of this Statement required the Company to reclassify the debt extinguishments recorded as extraordinary items in prior periods as interest expense in those periods. These debt extinguishments totaled $19 million in the fiscal year ended February 1, 2003.


EXHIBIT 21.1

SUBSIDIARIES OF THE KROGER CO.

Name        State of Incorporation/Organization  
Agri-Products, Inc.   Arkansas  
Bluefield Beverage Company   Ohio  
Country Oven, Inc.   Ohio  
Dillon Companies, Inc.   Kansas  
                      Also Doing Business As:    
                                Baker’s Supermarkets   N/A*  
                                City Market   N/A*  
                                Dillon Food Stores   N/A*  
                                Dillon Stores Division, Inc.   N/A*  
                                Dillon Warehouse   N/A*  
                                Food 4 Less   N/A*  
                                Gerbes Supermarkets   N/A*  
                                Inter-American Products   N/A*  
                                King Soopers   N/A*  
                                Peyton’s Fountain   N/A*  
Dotto, Inc.   Indiana  
Embassy International, Inc.   Ohio  
Fred Meyer, Inc.   Delaware  
Henpil, Inc.   Texas  
           (Subsidiary of Rocket Newco, Inc.)    
Inter-American Foods, Inc.   Ohio  
Inter-American Products, Inc.   Ohio  
J.V. Distributing, Inc.   Michigan  
Kessel FP, L.L.C.   Michigan (limited liability company)  
Kessel RCD, L.L.C.   Michigan (limited liability company)  
Kessel Saginaw, L.L.C.   Michigan (limited liability company)  
KRGP Inc.   Ohio  
KRLP Inc.   Ohio  
The Kroger Co. of Michigan   Michigan  
                      Also Doing Business As:    
                                The Apple Orchard Fruit Market   N/A*  
                                Bi-Lo Discount Foods   N/A*  
                                Inter-American Products   N/A*  
                                Kessel Pharmacies   N/A*  
                                Kessel Food Markets   N/A*  
                                Kroger Fresh Fare   N/A*  
                                World of Videos, Movies and Munch More   N/A*  
Kroger Dedicated Logistics Co.   Ohio  
Kroger Group Cooperative, Inc.   Ohio  
                      Also Doing Business As:    
                                Kroger Group, Inc.   N/A*  
                                KGC, Inc.   N/A*  
Kroger Limited Partnership I   Ohio (limited partnership)  
                      Also Doing Business As:    
                                Chef’s Choice Catering   N/A*  
                                Foods Plus   N/A*  
                                Hilander Food Stores   N/A*  
                                JayC Food Stores   N/A*  
                                Kentucky Distribution Center   N/A*  
                                Kroger Food Stores   N/A*  



                                Owen’s Supermarket        N/A*  
                                Peyton’s Southeastern   N/A*  
                                Queen City Centre   N/A*  
                                Ruler Discount Foods   N/A*  
Kroger Limited Partnership II   Ohio (limited partnership)  
                      Also Doing Business As:    
                                Country Oven Bakery   N/A*  
                                Crossroad Farms Dairy   N/A*  
                                Inter-American Products   N/A*  
                                K. B. Specialty Foods   N/A*  
                                Kenlake Foods   N/A*  
                                Pace Dairy of Indiana   N/A*  
                                Peyton’s Northern   N/A*  
                                Winchester Farms Dairy   N/A*  
Kroger Management Co.   Michigan  
Kroger Prescription Plans, Inc.   Ohio  
Kroger Texas L.P.   Ohio (limited partnership)  
                      Also Doing Business As:    
                                America’s Beverage Company   N/A*  
                                Inter-American Products   N/A*  
                                Kroger Kwik Shop   N/A*  
                                Vandervoort Dairy Food Company   N/A*  
Michigan Dairy, L.L.C.   Michigan (limited liability company)  
Pace Dairy Foods Company   Ohio  
Pay Less Super Markets, Inc.   Indiana  
Peyton’s-Southeastern, Inc.   Tennessee  
                      Also Doing Business As:    
                                Peyton’s Mid-South Company   N/A*  
                                Supermarket Merchandisers Co.   N/A*  
Pontiac Foods, Inc.   South Carolina  
Queen City Assurance, Inc.   Vermont  
           (Subsidiary of The Kroger Co. of Michigan)    
RJD Assurance, Inc.   Vermont  
Rocket Newco, Inc.   Texas  
Southern Ice Cream Specialties, Inc.   Ohio  
Topvalco, Inc.   Ohio  
Vine Court Assurance Incorporated   Vermont  
 
                                Subsidiaries of Dillon Companies, Inc.    
 
Dillon Real Estate Co., Inc.   Kansas  
Junior Food Stores of West Florida, Inc.   Florida  
                      Also Doing Business As:    
                                Tom Thumb Food Stores   N/A*  
Kwik Shop, Inc.   Kansas  
Mini Mart, Inc.   Wyoming  
                      Also Doing Business As:    
                                Loaf ‘N Jug, Inc.   N/A*  
Quik Stop Markets, Inc.   California  
THGP Co., Inc.   Pennsylvania  
THLP Co., Inc.   Pennsylvania  
Turkey Hill, L.P.   Pennsylvania (limited partnership)  
                      Also Doing Business As:    
                                Inter-American Products   N/A*  
                                Turkey Hill Dairy, Inc.   N/A*  
                                Turkey Hill Minit Markets   N/A*  



                                Subsidiaries of Fred Meyer, Inc.         
Fred Meyer Stores, Inc.   Ohio  
          (Subsidiary of Fred Meyer, Inc.)    
                      Also Doing Business as:    
                                FM Fuel Stop   N/A*  
                                Fred Meyer   N/A*  
                                Inter-American Products   N/A*  
                                Quality Food Centers   N/A*  
                                Swan Island Dairy   N/A*  
CB&S Advertising Agency, Inc.   Oregon  
          (Subsidiary of Fred Meyer Stores, Inc.)    
Distribution Trucking Company   Oregon  
          (Subsidiary of Fred Meyer Stores, Inc.)    
FM, Inc.   Utah  
          (Subsidiary of Fred Meyer Stores, Inc.)    
Fred Meyer (HK) Limited   Hong Kong  
          (Subsidiary of Fred Meyer Stores, Inc.)    
Fred Meyer Jewelers, Inc.   California  
          (Subsidiary of Fred Meyer Stores, Inc.)    
                      Also Doing Business As:    
                                Littman Jewelers   N/A*  
                                Barclay Jewelers   N/A*  
FMJ, Inc.   Delaware  
          (Subsidiary of Fred Meyer Jewelers, Inc.)    
                      Also Doing Business As:    
          Fred Meyer Jewelers Mail Order   N/A*  
          fredmeyerjewelers.com   N/A*  
          littmanjewelers.com   N/A*  
Smith’s Food & Drug Centers, Inc.   Ohio  
          (Subsidiary of Fred Meyer, Inc.)    
                      Also Doing Business As:    
                                Fry’s Food & Drug Stores   N/A*  
                                Fry’s Marketplace   N/A*  
                                Peyton’s Phoenix   N/A*  
                                Smith’s Food & Drug Stores   N/A*  
                                Smith’s Food King   N/A*  
                                Smith’s Fuel Centers   N/A*  
                                Smith’s Marketplace   N/A*  
Smith’s Beverage of Wyoming   Wyoming  
          (Subsidiary of Smith’s Food & Drug Centers, Inc.)    
Healthy Options Inc.   Delaware  
          (Subsidiary of Fred Meyer, Inc.)    
                      Also Doing Business As:    
                                Postal Prescription Services   N/A*  
Hughes Markets, Inc.   California  
          (Subsidiary of Fred Meyer Stores, Inc.)    
Hughes Realty, Inc.   California  
          (Subsidiary of Hughes Markets, Inc.)    
Second Story, Inc.   Washington  
          (Subsidiary of Fred Meyer Stores, Inc.)    
Food 4 Less Holdings, Inc.   Delaware  
          (Subsidiary of Fred Meyer, Inc.)    
Ralphs Grocery Company   Ohio  
          (Subsidiary of Food 4 Less Holdings, Inc.)    
                      Also Doing Business As:    



                                Food 4 Less        N/A*  
                                Food 4 Less Midwest   N/A*  
                                Foods Co.   N/A*  
                                Inter-American Products   N/A*  
                                Ralphs Fresh Fare   N/A*  
                                Ralphs Marketplace   N/A*  
Cala Co.   Delaware  
          (Subsidiary of Ralphs Grocery Company)    
Bay Area Warehouse Stores, Inc.   California  
          (Subsidiary of Cala Co.)    
Bell Markets, Inc.   California  
          (Subsidiary of Cala Co.)    
Cala Foods, Inc.   California  
          (Subsidiary of Cala Co.)      
Crawford Stores, Inc.   California  
          (Subsidiary of Ralphs Grocery Company)    
F4L L.P.   Ohio (limited partnership)  
Food 4 Less of Southern California, Inc.   Delaware  
          (Subsidiary of Ralphs Grocery Company)    
Alpha Beta Company   California  
          (Subsidiary of Food 4 Less of Southern California, Inc.)    
Food 4 Less GM, Inc.   California  
          (Subsidiary of Alpha Beta Company)    
Food 4 Less of California, Inc.   California  
          (Subsidiary of Alpha Beta Company)    
Food 4 Less Merchandising, Inc.   California  
          (Subsidiary of Alpha Beta Company)    


EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Forms S-3 (File No. 333-91388), S-4 (File No. 333-66961) and S-8 (File Nos. 33-38121, 33-38122, 33-53747, 33-55501, 333-27211, 333-78935, 333-89977, 333-45904, 333-91354, 333-106802, 333-126076 and 333-138152) of The Kroger Co. of our report dated April 4, 2007 relating to the financial statements, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which is included in this Annual Report on Form 10-K.



/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cincinnati, Ohio
April 4, 2007


EXHIBIT 24.1

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of THE KROGER CO. (the “Company”) hereby makes, constitutes and appoints Paul W. Heldman and Bruce M. Gack, or either of them, his or her true and lawful attorneys-in-fact to sign and execute for and on his or her behalf the Company’s annual report on Form 10-K, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Act”), as amended, in such form as they, or either of them, may approve and to do any and all other acts which said attorneys-in-fact, or either of them, may deem necessary or desirable to enable the Company to comply with said Act or the rules and regulation thereunder.

IN WITNESS WHEREOF, the undersigned director has hereunto set his or her hand as of the 30 th day of March 2007.

(Reuben V. Anderson)
Reuben V. Anderson


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of THE KROGER CO. (the “Company”) hereby makes, constitutes and appoints Paul W. Heldman and Bruce M. Gack, or either of them, his or her true and lawful attorneys-in-fact to sign and execute for and on his or her behalf the Company’s annual report on Form 10-K, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Act”), as amended, in such form as they, or either of them, may approve and to do any and all other acts which said attorneys-in-fact, or either of them, may deem necessary or desirable to enable the Company to comply with said Act or the rules and regulation thereunder.

IN WITNESS WHEREOF, the undersigned director has hereunto set his or her hand as of the 30 th day of March 2007.

(Robert D. Beyer)
Robert D. Beyer


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of THE KROGER CO. (the “Company”) hereby makes, constitutes and appoints Paul W. Heldman and Bruce M. Gack, or either of them, his or her true and lawful attorneys-in-fact to sign and execute for and on his or her behalf the Company’s annual report on Form 10-K, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Act”), as amended, in such form as they, or either of them, may approve and to do any and all other acts which said attorneys-in-fact, or either of them, may deem necessary or desirable to enable the Company to comply with said Act or the rules and regulation thereunder.

IN WITNESS WHEREOF, the undersigned director has hereunto set his or her hand as of the 30 th day of March 2007.

(John L. Clendenin)
John L. Clendenin


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of THE KROGER CO. (the “Company”) hereby makes, constitutes and appoints Paul W. Heldman and Bruce M. Gack, or either of them, his or her true and lawful attorneys-in-fact to sign and execute for and on his or her behalf the Company’s annual report on Form 10-K, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Act”), as amended, in such form as they, or either of them, may approve and to do any and all other acts which said attorneys-in-fact, or either of them, may deem necessary or desirable to enable the Company to comply with said Act or the rules and regulation thereunder.

IN WITNESS WHEREOF, the undersigned director has hereunto set his or her hand as of the 30 th day of March 2007.

(David B. Dillon)
David B. Dillon


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of THE KROGER CO. (the “Company”) hereby makes, constitutes and appoints Paul W. Heldman and Bruce M. Gack, or either of them, his or her true and lawful attorneys-in-fact to sign and execute for and on his or her behalf the Company’s annual report on Form 10-K, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Act”), as amended, in such form as they, or either of them, may approve and to do any and all other acts which said attorneys-in-fact, or either of them, may deem necessary or desirable to enable the Company to comply with said Act or the rules and regulation thereunder.

IN WITNESS WHEREOF, the undersigned director has hereunto set his or her hand as of the 30 th day of March 2007.

(David B. Lewis)
David B. Lewis


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of THE KROGER CO. (the “Company”) hereby makes, constitutes and appoints Paul W. Heldman and Bruce M. Gack, or either of them, his or her true and lawful attorneys-in-fact to sign and execute for and on his or her behalf the Company’s annual report on Form 10-K, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Act”), as amended, in such form as they, or either of them, may approve and to do any and all other acts which said attorneys-in-fact, or either of them, may deem necessary or desirable to enable the Company to comply with said Act or the rules and regulation thereunder.

IN WITNESS WHEREOF, the undersigned director has hereunto set his or her hand as of the 30 th day of March 2007.

(John T. LaMacchia)
John T. LaMacchia


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of THE KROGER CO. (the “Company”) hereby makes, constitutes and appoints Paul W. Heldman and Bruce M. Gack, or either of them, his or her true and lawful attorneys-in-fact to sign and execute for and on his or her behalf the Company’s annual report on Form 10-K, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Act”), as amended, in such form as they, or either of them, may approve and to do any and all other acts which said attorneys-in-fact, or either of them, may deem necessary or desirable to enable the Company to comply with said Act or the rules and regulation thereunder.

IN WITNESS WHEREOF, the undersigned director has hereunto set his or her hand as of the 30 th day of March 2007.

(Don W. McGeorge)
Don W. McGeorge


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of THE KROGER CO. (the “Company”) hereby makes, constitutes and appoints Paul W. Heldman and Bruce M. Gack, or either of them, his or her true and lawful attorneys-in-fact to sign and execute for and on his or her behalf the Company’s annual report on Form 10-K, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Act”), as amended, in such form as they, or either of them, may approve and to do any and all other acts which said attorneys-in-fact, or either of them, may deem necessary or desirable to enable the Company to comply with said Act or the rules and regulation thereunder.

IN WITNESS WHEREOF, the undersigned director has hereunto set his or her hand as of the 30 th day of March 2007.

(W. Rodney McMullen)
W. Rodney McMullen


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of THE KROGER CO. (the “Company”) hereby makes, constitutes and appoints Paul W. Heldman and Bruce M. Gack, or either of them, his or her true and lawful attorneys-in-fact to sign and execute for and on his or her behalf the Company’s annual report on Form 10-K, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Act”), as amended, in such form as they, or either of them, may approve and to do any and all other acts which said attorneys-in-fact, or either of them, may deem necessary or desirable to enable the Company to comply with said Act or the rules and regulation thereunder.

IN WITNESS WHEREOF, the undersigned director has hereunto set his or her hand as of the 30 th day of March 2007.

(Jorge P. Montoya)
Jorge P. Montoya


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of THE KROGER CO. (the “Company”) hereby makes, constitutes and appoints Paul W. Heldman and Bruce M. Gack, or either of them, his or her true and lawful attorneys-in-fact to sign and execute for and on his or her behalf the Company’s annual report on Form 10-K, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Act”), as amended, in such form as they, or either of them, may approve and to do any and all other acts which said attorneys-in-fact, or either of them, may deem necessary or desirable to enable the Company to comply with said Act or the rules and regulation thereunder.

IN WITNESS WHEREOF, the undersigned director has hereunto set his or her hand as of the 30 th day of March 2007.

(Clyde R. Moore)
Clyde R. Moore


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of THE KROGER CO. (the “Company”) hereby makes, constitutes and appoints Paul W. Heldman and Bruce M. Gack, or either of them, his or her true and lawful attorneys-in-fact to sign and execute for and on his or her behalf the Company’s annual report on Form 10-K, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Act”), as amended, in such form as they, or either of them, may approve and to do any and all other acts which said attorneys-in-fact, or either of them, may deem necessary or desirable to enable the Company to comply with said Act or the rules and regulation thereunder.

IN WITNESS WHEREOF, the undersigned director has hereunto set his or her hand as of the 30 th day of March 2007.

(Susan M. Phillips)
Susan M. Phillips


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of THE KROGER CO. (the “Company”) hereby makes, constitutes and appoints Paul W. Heldman and Bruce M. Gack, or either of them, his or her true and lawful attorneys-in-fact to sign and execute for and on his or her behalf the Company’s annual report on Form 10-K, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Act”), as amended, in such form as they, or either of them, may approve and to do any and all other acts which said attorneys-in-fact, or either of them, may deem necessary or desirable to enable the Company to comply with said Act or the rules and regulation thereunder.

IN WITNESS WHEREOF, the undersigned director has hereunto set his or her hand as of the 30 th day of March 2007.

(Steven R. Rogel)
Steven R. Rogel


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of THE KROGER CO. (the “Company”) hereby makes, constitutes and appoints Paul W. Heldman and Bruce M. Gack, or either of them, his or her true and lawful attorneys-in-fact to sign and execute for and on his or her behalf the Company’s annual report on Form 10-K, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Act”), as amended, in such form as they, or either of them, may approve and to do any and all other acts which said attorneys-in-fact, or either of them, may deem necessary or desirable to enable the Company to comply with said Act or the rules and regulation thereunder.

IN WITNESS WHEREOF, the undersigned director has hereunto set his or her hand as of the 30 th day of March 2007.

(James A. Runde)
James A. Runde


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of THE KROGER CO. (the “Company”) hereby makes, constitutes and appoints Paul W. Heldman and Bruce M. Gack, or either of them, his or her true and lawful attorneys-in-fact to sign and execute for and on his or her behalf the Company’s annual report on Form 10-K, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Act”), as amended, in such form as they, or either of them, may approve and to do any and all other acts which said attorneys-in-fact, or either of them, may deem necessary or desirable to enable the Company to comply with said Act or the rules and regulation thereunder.

IN WITNESS WHEREOF, the undersigned director has hereunto set his or her hand as of the 30 th day of March 2007.

(Ronald L. Sargent)
Ronald L. Sargent


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned director of THE KROGER CO. (the “Company”) hereby makes, constitutes and appoints Paul W. Heldman and Bruce M. Gack, or either of them, his or her true and lawful attorneys-in-fact to sign and execute for and on his or her behalf the Company’s annual report on Form 10-K, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Act”), as amended, in such form as they, or either of them, may approve and to do any and all other acts which said attorneys-in-fact, or either of them, may deem necessary or desirable to enable the Company to comply with said Act or the rules and regulation thereunder.

IN WITNESS WHEREOF, the undersigned director has hereunto set his or her hand as of the 30 th day of March 2007.

(Bobby S. Shackouls)
Bobby S. Shackouls


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

The undersigned officer of THE KROGER CO. (the “Company”) does hereby severally make, constitute and appoint Paul W. Heldman or Bruce M. Gack, or either of them, his true and lawful attorneys-in-fact to sign and execute for and on his behalf the Company’s annual report on Form 10-K, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Act”), as amended, in such form as they, or either of them, may approve and to do any and all other acts which said attorneys-in-fact, or either of them, may deem necessary or desirable to enable the Company to comply with said Act or the rules and regulations thereunder.

IN WITNESS WHEREOF, I have hereunto set my hand.

(David B. Dillon)     March 30, 2007  
David B. Dillon    
Chairman of the Board and Chief Executive Officer    


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

The undersigned officer of THE KROGER CO. (the “Company”) does hereby severally make, constitute and appoint Paul W. Heldman or Bruce M. Gack, or either of them, his true and lawful attorneys-in-fact to sign and execute for and on his behalf the Company’s annual report on Form 10-K, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Act”), as amended, in such form as they, or either of them, may approve and to do any and all other acts which said attorneys-in-fact, or either of them, may deem necessary or desirable to enable the Company to comply with said Act or the rules and regulations thereunder.

IN WITNESS WHEREOF, I have hereunto set my hand.

(J. Michael Schlotman)     March 30, 2007  
J. Michael Schlotman    
Senior Vice President and Chief Financial Officer    


POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS:

The undersigned officer of THE KROGER CO. (the “Company”) does hereby severally make, constitute and appoint Paul W. Heldman or Bruce M. Gack, or either of them, her true and lawful attorneys-in-fact to sign and execute for and on her behalf the Company’s annual report on Form 10-K, and any and all amendments thereto, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 (the “Act”), as amended, in such form as they, or either of them, may approve and to do any and all other acts which said attorneys-in-fact, or either of them, may deem necessary or desirable to enable the Company to comply with said Act or the rules and regulations thereunder.

IN WITNESS WHEREOF, I have hereunto set my hand.

(M. Elizabeth Van Oflen)     March 30, 2007  
M. Elizabeth Van Oflen    
Vice President and Controller    
And Principal Accounting Officer    


EXHIBIT 31.1

I, David B. Dillon, certify that:

1. I have reviewed this annual report on Form 10-K of The Kroger Co.;
 
2.       Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
  
Date: April 4, 2007   /s/ David B. Dillon  
  David B. Dillon  
  Chairman of the Board and  
  Chief Executive Officer  
  (principal executive officer)  


EXHIBIT 31.2

I, J. Michael Schlotman, certify that:

1. I have reviewed this annual report on Form 10-K of The Kroger Co.;
 
2.       Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
  a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
  a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
  
Date: April 4, 2007   /s/ J. Michael Schlotman  
  J. Michael Schlotman  
  Senior Vice President and Chief Financial Officer  
  (principal financial officer)  


EXHIBIT 32.1

NOTE: The referenced officers, based on their knowledge, furnish the following certification, pursuant to 18 U.S.C. Section 1350.

We, David B. Dillon, Chief Executive Officer, and J. Michael Schlotman, Senior Vice President and Chief Financial Officer, of The Kroger Co. (the “Company”), do hereby certify in accordance with 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     1.       The Annual Report on Form 10-K of the Company for the period ending February 3, 2007 (the “Periodic Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. Section 78m or 78o(d)); and
 
2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Dated: April 4, 2007   /s/ David B. Dillon  
  David B. Dillon  
  Chairman of the Board and Chief Executive Officer  
 
  /s/ J. Michael Schlotman  
  J. Michael Schlotman  
  Senior Vice President and Chief Financial Officer  

A signed original of this written statement as required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to The Kroger Co., and will be retained by The Kroger Co. and furnished to the SEC or its staff upon request.