Fitch Affirms Kroger's IDR at 'BBB', Outlook Changed to Stable.

NEW YORK -- Fitch has affirmed its 'BBB' ratings on The Kroger Co.'s (Kroger) Issuer Default Rating (IDR), $6.3 billion senior notes, and $2.5 billion bank credit facilities as well as the 'F2' rating on the company's commercial paper program. The Rating Outlook has been changed to Stable from Negative.

The ratings reflect Kroger's well executed operating strategy which has led to strong market share positions and positive operating trends, its diverse store base and position as the largest U.S. supermarket company, and its strong cash flow generation. Also considered is the highly competitive operating environment facing the food retailers and Kroger's ability to maintain operating margins over time, as well as the company's dedication to returning funds to shareholders. The Stable Rating Outlook reflects the company's demonstrated ability to meet the long-term pressures facing the industry.

Kroger is the largest supermarket company in the U.S. generating over $60 billion in revenues and operating 2,507 food stores across an extensive geographic area and diverse store formats. As such, Kroger benefits from its broad experience competing against both traditional and non-traditional food retailers. Kroger's operating strategy, which is primarily focused on improving the customers' shopping experience through service, merchandise, and pricing, has allowed the company to maintain strong market share positions and positive operating trends across its markets. In fiscal year 2005 (year ended 1/28/06), Kroger maintained the #1 or #2 market share in 35 of its 44 major markets and non-fuel identical store sales were 3.5%, ahead of industry peers.

In addition, cost cutting efforts have allowed the company to maintain its operating profit margins in the face of increased energy costs and price competition and cash flow generation has remained strong. Kroger has directed a significant portion of its free cash flow to reduce debt balances over the past few years, and as a result, credit measures have strengthened. Leverage, measured by total adjusted debt/EBITDAR, strengthened to 3.2 times (x) in fiscal 2005 from 3.6 in 2004 and EBITDAR coverage of interest and rents improved to 3.4x from 2.9x over the same period. While Kroger has dedicated a larger portion of its free cash flow to debt reduction versus share repurchases in recent years, Kroger is expected to return funds to shareholders in accordance with its stated policy of using one-third of free cash flow for debt reduction and two-thirds for shareholder returns. Nonetheless, Fitch anticipates that Kroger will continue to reduce debt over time and that this, combined with growth in the company's core operations, will allow it to maintain a strong credit profile.

The food retail segment remains highly competitive and the ability of industry participants to maintain operating profit margins will remain challenging. Fitch anticipates that the large food retailers such as Kroger, will continue to demonstrate their ability to effectively compete in the current operating environment. Over the longer term, merger and acquisition activity in the sector is expected to continue. As the largest operator in the sector, Kroger could participate in future activity. However, Fitch anticipates that any transaction would be balanced with the company's capital allocation strategy over time.

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