Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star one on your touchtone telephone. If your question is answered or you wish to withdraw your question, please press star two. Please press star one to begin. Your first question comes from the line of Deborah Weinswig representing Citi. Please proceed.

Susan Anderson – Citigroup

Hi. This is actually Susan Anderson for Deborah Weinswig. Good job on the quarter, you guys. First, can you talk a little bit about Kroger’s tuck-in strategy and the strategy for gaining market share? Do you expect any real estate opportunities to open up as a result of the weak economy and some consolidation we’re seeing? I think the last quarter, you mentioned that valuations are still too high. Have you seen those come down yet?

David B. Dillon

I didn’t hear the first part of your sentence but if I understood you right, you wanted to talk a little bit about how we see the market in terms of acquisitions.

Susan Anderson – Citigroup

Correct, yes.

David B. Dillon

And I would say we see it pretty much the same as what we’ve described before. We of course have lots of good opportunities we’ve seen in some of the end market acquisitions that we’ve made and those are episodic as they become available. Always interested in those.

Bigger ones, of course, are certainly available out there. There’s lots of opportunity but prices are still a little steep and we tend to be cautious and wanting to be careful to pick something that’s a good fit for us. Rodney, do you want to add anything?

W. Rodney McMullen

No, I just completely agree and we continue to look at several things but from a pricing standpoint, we haven’t found anything that really makes sense.

Susan Anderson – Citigroup

Okay, great. And then also can you talk a little bit about the competitive environment? It seems like it’s still pretty stiff out there. It seems like a number of grocers are doing things in terms of price cut promotions to drive traffic. Maybe talk about what you guys are doing and then also what you are doing with your loyalty card, any new initiatives there?

David B. Dillon

Sure. Well, the competitive environment, as always, I think, is probably our standard description is it’s a very competitive environment out there and you’re right -- in a number of markets, people are reaching out for sales. We feel though pretty good about our situation. In fact, if you think about -- let’s think about the sales we just reported, the identical sales growth without fuel of 3.1%. Sometimes that number is a great indication of where we are. Sometimes it’s actually too good of an indication of where we are and that is, it overstates the fact; and other times, it’s the reverse. In this case, I think there are a number of factors that suggest that the 3.1 actually is not as good an indicator of where we are, that we actually did better than what that number shows. We talked about some of those but if you think about the competitive environment and how that plays out, our tonnage and units was up, our pharmacy scripts are up, our gasoline gallons are up, our Kroger brand sales were up strongly. We’re seeing some wild numbers that will tend to cause these numbers to get a little skewed, like the inflation and deflation we described, particularly in milk where our units were up strongly but the dollars are down because of the deflation in milk, as an example.

We of course are seeing the impact of discretionary GM but from the customer point of view, we’re seeing behavior that, based on the economy, that is pretty similar to what we’ve seen in the past. And one of the reasons we are comfortable in describing this continuing is if you look at our second quarter so far through four weeks, we are about the same level of identical sales without fuel as what we were running in the quarter we just finished. That continues to give us confidence that while the consumer is uncertain and that uncertainty seems to be continuing, it does not seem to be getting worse but at the same time, it doesn’t look like it’s materially improving.

Now I realize that doesn’t get exactly to the competitive question but to me the way for us to answer that is how are we doing and how are we feeling we’re connecting with our customers and what are we seeing in our sales. And as you can tell, I’m actually more bullish, even, then the 3.1% ought to imply and in these circumstances, 3.1 is pretty darn good.