Kroger provides a competitive advantage through its private label brands. Additional fuel centers increase customer traffic. Kroger has the most defensive positioning as a best in class supermarket through superior data management and improved market share. An investment in Kroger is merited with a price target above $xx.xx based on discounted cash flow and comparable company analyses.

1. The Kroger Co. (KR):
DISCUSSION MATERIALS
Andrew Boone

2. 1
Investment Merits
 Kroger private label brands provide a competitive
advantage
 Additional fuel centers will increase customer traffic
 Best in class super market with most defensive
positioning
 Superior data management
 Improved market share
 Buy: Price target of $xx.xx
MERITS
FALL 2011

3. 2
Kroger Co. Overview
2 year price history
Miscellaneous considerations Market characteristics
 Kroger Co. accounts for COGS using FIFO  Enterprise value:
 Market cap: $13.05bn
 52 week high: $25.85 (7/20/11)
 52 week low: $20.53 (12/10/10)
 Vol.: 3.067mm
 Next earnings date: December 1st
 Dividend yield: 1.9%
OVERVIEW
FALL 2011

4. 3
The Kroger Co. is…
Stores Different Business Lines
% of  Traditionally cater to customers in a 2.0-2.5 mile radius
Stores revenue
Total Supermarkets 2,460 94.0%
 At the end of 2010, Kroger had 1,014 fuel centers
attached to a supermarket
Combination Food & Drug
Store 2,128  Kroger operates more than 40 manufacturing plants
Multi-Department Stores 125
Marketplace Stores 61
 361 jewelry stores (149 in stores & 212 in shopping
malls)
Price Impact Warehouses 146
Convenience Stores 784 5.0%  Product of the 1999 takeover of Fred Meyer Jewelers
Jewelry Stores 361 0.5%
Other* N/A 0.5%
 Historically, 95% of revenues come from supermarkets
OVERVIEW
FALL 2011

5. 4
Kroger has historically been…
Stores
2007 2008 2009 2010
Stores Stores Stores Stores
Total Supermarkets 2,486 2,482 2,468 2,460
Combination Food & Drug Store 2,183 2,169 2,143 2,128
Multi-Department Stores 123 124 125 125
Marketplace Stores 35 43 53 61
Price Impact Warehouses 145 146 147 146
Convenience Stores 782 771 777 784
Jew elry Stores 394 385 374 361
Different Business Lines
Combination Food & Drug – Complete supermarket & pharmacy
Multi-Department – Combo store with apparel & food departments
Marketplace – Combo store with additional living and home goods
OVERVIEW
Price Impact Warehouse – “No frills, low cost” shopping
FALL 2011

6. 5
Investment Merits
 Kroger private label brands provide a competitive
advantage
MERITS
FALL 2011

7. 6
Kroger does a cost analysis for each private label good
and manufactures 40% of these products
Percent of consumers who agreed with the following statements about private label goods (Source: Mintel)
Store brand products are of better quality today than they were five years
44.0%
ago
I compare the ingredients listed in store brand products with the name brand
42.0%
versions
I would recommend a store brand product 39.0%
I purchase store brand products only because I want to save money – but I’d
35.0%
rather purchase name brands
I don’t feel like I’m giving anything up (e.g. flavor, quality, prestige) by using
34.0%
store brands
I trust the ingredients of name brand products more than store brand 23.0%
I think it’s worth paying more for name brand products 19.0%
U.S. private label sales (Source: Mintel)
70,000 12.0%
60,000 10.0%
50,000 Sales
8.0%
($mm)
40,000
6.0%
30,000
4.0%
20,000 Annual
PRIVATE LABEL
2.0% Growth %
10,000
0 0.0%
2005A 2006A 2007A 2008A 2009A 2010E 2011E 2012E 2013E 2014E
FALL 2011

8. 7
Unemployment has shackled consumer spending and will
keep consumers watching spending
US unemployment (source: Bureau of Labor Statistics)
Private label as % of US supermarket sales Jan. 2008-Sept. 2011 (Source: Nielsen, Credit Suisse)
PRIVATE LABEL
FALL 2011

9. 8
Three tiered branding structure provides exposures
shopping demographics
• “Best” quality brand
Private • Offers 1,000 Private Selection Items
Selection
• “Better” tier
• 13 new categories
Banner
Brands • Moderation Pillar allows shoppers an easy way to find healthy items
• “Good” tier
Value • Basic products priced to fit in budgets
Brand
 27% of grocery sales were from  Private label units sold have
private label goods in 2010, from increased to 35% of all grocery
PRIVATE LABEL
2007 numbers of 26% sales in 2010, from 32% in 2007
FALL 2011

10. 9
Kroger manufactures 40% of their own products:
vertical structure improves logistics and margins
Labor Manufacturing facilities
 99.8% of shoppers buy a corporate brand  18 dairies
product every 12 weeks
 10 deli or bakery plants
 Big K cola received new packaging and
added Ralphs as a distribution line  5 grocery plants
 Kroger does a price analysis when deciding  3 beverage plants
whether to manufacture or outsource  2 meat plants
 2 cheese plants
PRIVATE LABEL
FALL 2011

11. 10
Investment Merits
 Additional fuel centers will increase customer traffic
MERITS
FALL 2011

12. 11
Same store sales have been buoyed by the addition of
fuel sales but still have room to grow
Supermarket and fuel center units
3,000 45.0%
2,500 Total
41.2% 40.0% supermarkets
2,000
36.2% 35.0% Attached fuel
centers
1,500
31.5% 30.0%
1,000
Percent of
supermarkets
28.0%
with fuel
25.0%
500 centers
0 20.0%
2007 2008 2009 2010
 Fuel provides virtually no margins but as gas  Kroger loyalty points allow shoppers to gain
prices remain high, it drives consumers to further discounts as they spend more dollars
take advantage of the Kroger’s low fuel prices on grocery sales - $100 spent on groceries
FUEL CENTERS
and shop for groceries at the store allow for a $.10 discount per gallon of gas
FALL 2011

13. 12
Same Store Sales show Kroger continuing to win
Same Store Sales (Source: Factset)
12.0%
10.0%
8.0%
6.0% Kroger
4.0% Safeway
2.0% SuperValu
0.0% Wal-Mart
(2.0%) 2006 2007 2008 2009 2010 Costco
(4.0%)
(6.0%)
(8.0%)
Percent of stores with attached fuel centers (Wal-Mart and SuperValu do not disclose fuel center count)
70.0%
65.0%
60.0%
55.0%
50.0%
45.0% Kroger
40.0% Safeway
35.0%
30.0% Costco
25.0%
FUEL CENTERS
20.0%
15.0%
2008 2009 2010
FALL 2011

14. 13
Investment Merits
 Best in class super market with most defensive
positioning
 Superior data management
 Improved market share
MERITS
FALL 2011

15. 14
Exclusive DunnHumbyUSA partnership allows Kroger
insights into consumer trends
Customer Loyalty Card Program
 50% of US households have a Kroger  Base capital projects on feedback
loyalty card received from DunnHumby to ensure
that Kroger remains client focused
 90% of purchases at stores use a loyalty
card
“We’ve been doing this for, I don’t know, I guess six years
now and if you look at the trend over time, we’ve had
tremendous improvement in terms of being able to engage
with the customer in a way that they appreciate and need
better and better. And it’s something that every quarter we
get better but we’re constantly working with dunnhumby
and our merchandising teams to figure out how to even get
better from where we are.”
- Kroger Management Team (2011 Q2 earnings call)
BEST IN CLASS
FALL 2011

16. Superior market share allows for superior economies of 15
scale and lower prices that continues to drive consumers
to Kroger units
Weighted Average Market Share (Source: Metro Market Studies)
30.0%
27.0%
24.0%
21.0%
18.0%
15.0%
Kroger Safeway Supervalu (Excluding Save-A-
Lot)
Average basket size for Kroger is 14% lower than Safeway, 18% below
BEST IN CLASS
Harris Tweeter, and only 6% more expensive than Wal-Mart*
FALL 2011
*Source: Wall St. Research

17. 16
Discounted Cash Flow (avg of two methods $27.03)
Perpetuity
Sum 25,046.2
Debt 6,962.0
Assumptions Cash 643.0
Growth 4.0% Pension Underfunding 973.0
Gross margin 75.4% Equity Value 17,754.2
OG&A step $550.0 Price per share $29.73
CapEx as % of
2.6% Multiples
sales
Depreciation as % Equity Value 21,803.4
11.8% Debt 6,962.0
of beginning assets
Tax 33.0% Cash 643.0
Shares 597.1 Pension Underfunding 973.0
Equity Value 14,511.4
Price per share $24.30
Discount Rate Discount Rate
12.5% 11.5% 10.5% 10.0% 9.5% 8.5% 7.5% 6.5% 12.5% 11.5% 10.5% 10.0% 9.5% 8.5% 7.5% 6.5%
Terminal Multiple
Terminal Growth
1.5% $12.02 $15.12 $18.95 $21.22 $23.79 $30.07 $38.54 $50.48 4.50x $16.09 $17.67 $19.36 $20.25 $21.16 $23.10 $25.17 $27.38
2.0% $13.41 $16.85 $21.14 $23.70 $26.63 $33.88 $43.86 $58.41 4.75x $17.25 $18.90 $20.66 $21.59 $22.55 $24.57 $26.73 $29.05
2.5% $14.94 $18.76 $23.60 $26.52 $29.87 $38.32 $50.26 $68.31 5.00x $18.40 $20.12 $21.96 $22.93 $23.93 $26.04 $28.30 $30.72
3.0% $16.63 $20.91 $26.38 $29.73 $33.61 $43.57 $58.07 $81.04 5.25x $19.55 $21.35 $23.27 $24.27 $25.32 $27.52 $29.87 $32.39
3.5% $18.51 $23.32 $29.57 $33.44 $37.98 $49.87 $67.84 $98.01 5.50x $20.71 $22.57 $24.57 $25.62 $26.70 $28.99 $31.44 $34.06
VALUATION
4.0% $20.61 $26.06 $33.24 $37.77 $43.14 $57.57 $80.40 $121.78 5.75x $21.86 $23.80 $25.87 $26.96 $28.09 $30.46 $33.00 $35.73
4.5% $22.98 $29.18 $37.53 $42.88 $49.34 $67.19 $97.15 $157.42 6.00x $23.01 $25.02 $27.17 $28.30 $29.47 $31.93 $34.57 $37.40
FALL 2011

18. 17
Comparable companies*
The Kroger Co.
Fiscal Enterprise Price / EPS Enterprise Value /
Company Name Period Value LTM FY1 NTM Sales EBIT EBITDA
The Kroger Co. (kr-us) 08/2011 19,557.7 11.92 11.74 10.96 0.22x 8.6x 5.0x
Peer Summary Analysis
Mean - 73,637.8 12.07 12.49 12.00 0.36x 11.1x 15.9x
Median - 21,472.6 11.96 11.39 10.61 0.32x 10.7x 9.0x
Peer Universe (4 comps)
Costco Wholesale Corp. (COST) 04/2011 32,074.6 25.38 21.03 20.70 0.38x 13.5x 10.0x
SUPERVALU, Inc. (SVU) 06/2011 8,384.8 (1.05) 6.15 6.09 0.23x - 40.9x
Wal-M art Stores, Inc. (WM T) 07/2011 243,221.2 11.64 12.22 11.49 0.57x 10.7x 8.0x
Safeway, Inc. (SWY-US) 06/2011 10,870.7 12.29 10.57 9.73 0.26x 9.2x 4.7x
VALUATION
Source: Factset FALL 2011
*Downloaded 10/10/2011

19. Supervalu (SVU)
Good The bad – Heavily levered
 Cheap (6.1x NTM EPS) SVU SWY KR
 $1.87bn goodwill impairment made Debt 5,553.0 4,490.0 7,662.0
numbers seem much worse at a superficial LTM Interest 535.0 286.8 449.0
level
EBITDA 1,833.0 2,366.0 3,716.0
 Has experience improving margins, however
EBIT 894.0 1177.6 2,200.0
this may be due to a smaller reinvestment
in stores – they halved CapEx from FY2009 Debt/EBITDA 3.0x 1.9x 2.1x
yet developed 132 new stores in FY2011 EBIT/Interest 1.7x 4.1x 4.9x
Pension plan
 Plan assets are as of February 26th, 2011 - Plan at Feb. 27, 2010
S&P 500 is down 9.5% over this time frame Total pension assets $1,896.0
Total PBO 2,663.0
 A 25bps reduction in the discount rate
Underfunded status (767.0)
would increase pension expense by
$10mm
Discount rate 6.0%
 Discount rate derived by AA corporate Expected return on assets 7.8%
% in equities 53.5%
VALUATION
% in P/E & real estate 10.8%
% in fixed income 35.6%
FALL 2011

20. Safeway (SWY)
The Good – Safeway has produced superior margins The bad – Heavily levered
 Safeway trades at 12.3x LTM EPS (11.9x KR)
SWY SVU WMT COST KR and at 9.7x NTM EPS (10.9x KR) and 4.7x
EV/EBITDA (5x KR)
Gross FY0 28.3% 22.5% 24.7% 12.8% 20.3%
 Debt to EV is .46x for Safeway (.38x KR)
Gross FY-1 28.6% 22.4% 24.8% 12.7% 21.2%
 KR should trade a premium because of their
EBITDA Margin ID sales. While SWY has better margins, I
5.8% 4.9% 7.3% 3.7% 4.5%
FYO believe the most price conscious shopper is
EBITDA Margin being driven to KR stores (average KR
6.4% 5.4% 6.9% 3.6% 4.8%
FY-1 basket is 14% cheaper*)
The Bad – Safeway has been consistently produced disappointing identical store sales
3.0% 8.0%
2.0% 6.0%
1.0% 4.0%
0.0% 2.0% Kroger
(1.0%)
0.0% Safeway
(2.0%)
(2.0%) SuperValu
(3.0%)
(4.0%) (4.0%) Wal-Mart
(5.0%) (6.0%)
VALUATION
(8.0%)
2006 2007 2008 2009 2010
FALL 2011
*Source: Wall St. Research

21. Wal-Mart (WMT)
The Good – EM growth WMT vs. KR
New sq ft (mm) in FY12  Wal-Mart had a massive price roll back last
Sub-Saharan Africa 17.2 spring that did not effect KR same store
LatAm 13.2 sales at all.
Asia 8.2  Same store sales for WMT have not
Other 4.3 exceeded 1% in 10 consecutive quarters
 WMT trades at 8x EV/EBITDA (5x KR) &
The international segment accounted for 26.1% 11.5x NTM EPS (11x KR). With it’s superior
of FY2011 net sales margins & better ID sales it should receive a
premium
The Bad - We are seeing the maturation of WMT for the US segment – No where else to grow
3850 180
3800 160
3750
140
3700
3650 120
3600 100
3550 Stores - End of Year
80
3500 Net Opened Stores
60
3450
40
3400
3350 20
VALUATION
3300 0
FY2007 FY2008 FY2009 FY2010 FY2011
FALL 2011

22. 21
Risks
Increased margin pressure Pension Obligation
 KR is subject to union labor. SWY, COST and SVU do  Pension short fall was $973mm at January 29th,
as well but WMT does not 2011
− KR will renegotiate contracts with workers in  Discount rate was 5.6%. If the discount rate was to
California, Memphis and West Virginia over the be lowered by 1% it would increase PBO by $342mm
remainder of 2011
 Kroger investments more aggressively with their
 KR has successfully passed along price increases to pension assets
consumers. However, management specifically
chose to contract gross margins. Margin  Poor performance will squeeze profitability
contraction may hamper financial performance  Similar to SVU but better capitalized
Higher hurdles Pension asset allocation 2010
 KR has experienced higher hurdles due to superior Global equity securities 22.1%
historical numbers
Emerging market equity securities 9.4%
 Multiples may contract if past growth is not Investment grade debt securities 12.2%
maintained
High yield debt securities 13.6%
 Much of the historical growth has been due to
Private equity 6.3%
KR’s ability to pass through inflationary pressure
Hedge funds 23.1%
Real estate 2.4%
Other 10.9%
RISKS
FALL 2011

23. Amazon (AMZN):
Everyone’s retailer
APPENDIX

24. 23
Real growth vs. nominal growth
8.0%
6.0%
Nominal
Same
Store Sales
4.0%
2.0%
Real Same
Store Sales
0.0%
(2.0%)
2006 2007 2008 2009 2010
REVENUE
FALL 2011

25. 24
Discounted Cash Flow ($27.03)
In Millions 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 TV
Rev $76,148.0 $76,733.0 $82,127.0 $88,548.2 $92,090.1 $95,773.7 $99,604.6 $103,588.8 $107,732.4 $112,041.7 $115,402.9
COGS 58,012.0 58,429.0 63,354.0 69,082.2 71,767.4 74,638.1 77,623.6 80,728.5 83,957.7 87,316.0 89,935.5
Gross Margin 18,136.0 18,304.0 18,773.0 19,465.9 20,322.7 21,135.6 21,981.0 22,860.3 23,774.7 24,725.7 25,467.5
Gross Margin 23.8% 23.9% 22.9% 22.0% 22.1% 22.1% 22.1% 22.1% 22.1% 22.1% 22.1%
SG&A 14,229.0 14,527.0 14,948.0 15,516.0 16,066.0 16,616.0 17,166.0 17,716.0 18,266.0 18,816.0 19,366.0
Depreciation 1,443.0 1,525.0 1,600.0 1,746.0 1,662.3 1,748.3 1,835.5 1,924.1 2,014.5 2,106.9 2,106.9
Operating Profit 2,464.0 2,252.0 2,225.0 2,203.9 2,594.4 2,771.3 2,979.6 3,220.2 3,494.2 3,802.8 3,994.6
EBIT Margin 3.2% 2.9% 2.7% 2.5% 2.8% 2.9% 3.0% 3.1% 3.2% 3.4% 3.5%
One time items (12.0) (1,161.0) (43.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0
Tax 717.0 532.0 601.0 658.6 856.2 914.5 983.3 1,062.7 1,153.1 1,254.9 1,318.2
NOPAT 1,735.0 559.0 1,581.0 1,545.3 1,738.3 1,856.8 1,996.3 2,157.5 2,341.1 2,547.9 2,676.4
Working Capital (259.0) 73.0 370.0 (508.0) (83.7) (87.0) (90.5) (94.1) (97.9) (101.8) 0
Depreciation 1,443.0 1,525.0 1,600.0 1,746.0 1,662.3 1,748.3 1,835.5 1,924.1 2,014.5 2,106.9 2,106.9
CapEx (2,149.0) (2,297.0) (1,919.0) (1,634.0) (2,394.3) (2,490.1) (2,589.7) (2,693.3) (2,801.0) (2,913.1) (2,106.9)
Free Cash Flow 770.0 (140.0) 1,632.0 1,149.3 922.5 1,027.9 1,151.6 1,294.2 1,456.7 1,639.9 2,676.4
Present Value Multiplier 0.98 0.85 0.77 0.70 0.64 0.58 0.53 0.53
49.1 780.8 790.9 805.5 823.0 842.1 861.8 20,093.1
REVENUE
FALL 2011