Final KR Report

1 University of Oregon Investment Group
Covering Analysts: Gregg Anderson
and Charles Pontrelli
May 1, 2015
Consumer Goods
Investment Thesis
The recent acquisition of Harris Teeter and Vitacost.com provides Kroger
the opportunity to further penetrate and capitalize on the fast-growing
online, southeast and Mid-Atlantic markets. Successful penetration, via
Harris Teeters’ numerous locations and established brand, will result in
additional market share and diversification for Kroger’s revenue streams.
Kroger’s wide variety of stores and brands, spanning across 36 states,
provides various price points and value for nearly all consumers. This
unique diversity allows Kroger to adapt to shifting consumer trends and
maintain stable revenue streams.
Considering a proven management team, geographic diversification, clear
growth strategies, and little downside risk, Kroger offers investors a value
play.
The Kroger Company
Ticker: KR
Current Price: $70.55
Recommendation: Outperform
Price Target: $83.47
Five-Year Stock Chart
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Key Statistics
52 Week Price Range $44.72 - $77.74
50-Day Moving Average $75.33
Estimated Beta 0.63
Dividend Yield 1.00%
Market Capitalization (mm) $35,741.25
3-Year Revenue CAGR 3.88%
Trading Statistics
Diluted Shares Outstanding (mm) 502.41
Average Volume (3-Month) (mm) 4.32
Institutional Ownership 83.50%
Insider Ownership 6.11%
EBITDA Growth (2015E) 4.63%
Margins and Ratios
Gross Margin (2015E) 21.15%
EBITDA Margin (2015E) 4.67%
Net Margin (2015E) 1.58%
Debt to Enterprise Value 0.31

UOIG 2
University of Oregon Investment Group May 1, 2015
Business Overview
The Kroger Company (Kroger) was founded in 1883 by Bernard Kroger in
Cincinnati Ohio as a grocery store, and was incorporated in 1902. They
currently trade on the New York Stock Exchange under the ticker KR. Their
headquarters are in Cincinnati, Ohio. Kroger is now the largest supermarket
chain in America, the second-largest general retail chain behind Walmart, and
the fifth largest retailer in the world. They operate domestically in 36 states,
with over 3500 stores. Kroger also employs approximately 400,000 full- and
part- time employees, with the majority of these employees being covered by
collective bargaining agreements. There are approximately 300 bargaining
agreements that can range from three to five years.
Kroger’s stores consist of supermarkets, convenience stores, and jewelry stores.
In addition, their supermarkets operate under a few different formats:
combination food and drug stores, multi-department stores, marketplace stores,
and price impact warehouses. The majority of the supermarkets function under
the combo store format, which offer natural food and organic sections,
pharmacies, general merchandise, pet centers, and seafood and meat. Their
multi-department stores offer everything the combo stores offer, as well as
apparel, home furnishings, outdoor living, automotive products, electronics,
toys, and fine jewelry. Marketplace stores are a little smaller than multi-
department stores, but have similar offerings, and the price impact warehouses
offer a “no frills, low cost” warehouse format, similar to that of Costco.
Kroger operates a considerable amount of brands to meet every customer’s
needs. Their supermarkets stock over 13,000 private label items, on average.
Kroger’s corporate brand products are essential to their merchandising strategy,
and are separated into three tiers: premium, quality, and value. Private Selection
brand is designed to compete with other “gourmet” or “upscale” brands.
Kroger’s banner brands, such as Kroger, Ralph’s, Fred Meyer, King Scoopers,
and newly acquired Harris Teeter represent the majority of their private label
items, and are included under the quality tier. Before banner brand products are
carried in their stores, Kroger does extensive product quality testing to make
sure that the customers will be extremely satisfied, and Kroger has a satisfaction
guarantee. They also offer brands such as P$$T, Check This Out…, and
Heritage Farm, which fall under the value tier. These brands provide good
quality at a very low price. Kroger has also grown other brands extensively.
For example, their new brands Simple Truth and Simple Truth Organic provide
food free of artificial preservatives and ingredients, and Simple Truth Organic
has been certified organic by the USDA.
In 2013, Kroger announced they would acquire Harris Teeter, super market
chain based in the southeast portion of the United States. They acquired Harris
Teeter for $2.5 billion and assumed $100 million of Harris Teeter’s debt. This
acquisition gave Kroger access to Harris Teeter’s click and collect program,
which allows customers to order their groceries online and then pick them up in
a nearby store. Also, Kroger announced on March 3, 2015 that they will be
expanding their operations to Hawaii, which currently has Safeway, Wal-Mart,
Costco, Honolulu-based Foodland and Times, as well as Department of
Defense-owned DeCA Commissaries. Kroger is still deciding on whether they
will use the Kroger name or another banner brand, such as Fred Meyer or QFC.
Figure 1: Kroger Employee Growth
Source: Kroger 10-K
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Figure 2: Kroger Store Breakdown
Source: Kroger 10-K
70%
21%
9%
Supermarkets and Multi-Department Stores Convenience Stores Jewelry Stores
Figure 3: Kroger Identical Store Sales
Source: Kroger 10-K
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Industry
Overview
The Kroger Company operates in the Consumer Goods sector and the
Supermarkets and Grocery Stores industry. Businesses in this industry sell
general food products, including canned and frozen foods, fresh produce, fresh
and prepared meats, poultry, and seafood, and dairy products. Many companies
in this industry also provide ancillary household products and appliances. There
are approximately 42,036 businesses in this industry. While this is not a
relatively large industry, the competition level is very high. Kroger holds the
largest market share in this industry with approximately 15.4%. Safeway
follows behind with a 6.6% market share, then Publix Super Markets Inc. at
5.5%, followed by the rest of the industry. The majority of these companies
operate domestically.
Competition is very high in this industry due to supermarkets and grocery stores
competing fiercely for sales by offering discounts and promotions. Companies
like Kroger depend on their size and purchasing power to provide the lowest
prices. Goods within the industry are relatively homogeneous, so businesses
must compete on price. However, there has been a growing trend with
consumers of buying an increasing amount of natural and organic goods. This
allows companies to charge a higher price on their goods and boost revenues.
However, as organic and natural foods become more common with the
consumers, stores have to compete on price of those goods, as well.
Even though competition is relatively stiff in the industry, the market
concentration is very low. Reports estimate that over a third of the businesses
operating in this industry employ five or less employees. On top of that, the top
four companies account for approximately 30% of revenue in 2014. Most of the
players in the industry are small- to medium-sized companies, and operate in
local or regional markets. Even though this industry is segmented,
concentration has increased over the last few years with many mergers and
acquisitions by the industry leaders.
The Supermarkets and Grocery Stores industry has relatively low capital
intensity. It is estimated that for every dollar spent on labor in the industry, 9
cents will be spent on capital. Capital expenditures usually go towards the
purchase of buildings, as well as store assets, such as cash registers, shelving,
refrigerators, etc. Still, capital expenditures have been increasing due to the
expansion into online shopping, the addition of self-checkout systems, and
computerized point-of-sale systems. This industry demands a high amount of
labor because of the amount of work it takes to stock shelves, organize
inventories, and provide customer service. However, the amount of workers in
the industry has declined the past 5 years with the implementation of self-
checkout systems. Still, wages have increased because of the general economic
trend of increasing minimum wage standards.
While technology change has traditionally been low in this industry, there have
been many developments in the recent future that have changed the industry.
For example, the aforementioned self-checkout systems. Additionally, many
grocery store and supermarket chains are offering online ordering and
smartphone ordering, where customers can order from their computer or phone
and then have their purchases delivered to them or they can pick them up at a
nearby store. These same stores also offer online coupons and promotions so
that consumers can have access to their deals wherever they go. One of the
Figure 4: Industry Market Share
Source: IBIS World
Kroger 15.40%
Safeway, Inc. 6.60%
Publix Super Markets, Inc. 5.50%
Other 72.50%
Life Cycle Stage Mature
Revenue Volatility Low
Capital Intensity Low
Industry Assistance Low
Concentration Level Low
Regulation Level Medium
Technology Change Medium
Barriers to Entry Medium
Industry Globalization Low
Competition Level High
Figure 5: Industry Structure
Source: IBIS World
6.4% 7.3%
4.0% 4.6%
9.1% 9.7%
74.0%
75.4%
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Sector Industry
Other Rent & Utilities Wages Purchases Depreciation Marketing Profit
Figure 6: Sector vs. Industry Costs
Source: IBIS World

UOIG 4
latest technological advancements in the industry is the Pay By Touch system.
Consumer can set up a profile or “e-wallet” with the store that stores their bank
account, reward card, and/or credit card information. When they shop at the
store, the consumer only needs to provide their fingerprint and a passcode in
order to pay for their groceries. This provides for an easier and more secure way
of shopping.
The Supermarket and Grocery Stores utilizes a few metrics to measure company
performance, the two primary metrics being sales per square foot and same store
sales. Kroger has had positive same store sales growth for 45 straight quarters,
and is expected to continue this trend in the future. They also have relatively
high sales per square foot. It is expected that sales per square foot will continue
to increase due to Kroger focusing on operational efficiency and increasing their
offerings of natural and organic goods. This will be discussed later in the report
with the revenue model.
Macro factors
US Population
Total US Population is one macroeconomic factor that affects total sales.
Because supermarkets and grocery stores offer primarily necessities like food,
they have relatively stable revenue streams. Still, the more people that shop at
their store, the greater amount of revenue they will have. Additionally, Kroger
is trying to raise their sales per square foot by bringing in more customers. With
a higher total US Population, Kroger can capitalize on more customers. Total
US Population was factored into the revenue regression, and was projected into
2021 at approximately a .8% growth rate year over year. It is expected that the
US Population will continue to grow at a steady growth rate such as this one.
Producer Price Index
Another significant macroeconomic factor that drives the industry is the
Producer Price Index, or PPI. Because grocery stores and supermarkets compete
fiercely on prices to attract customers, they are highly affected by how much it
costs to produce their goods. The Producer Price Index measures relative
production costs for businesses and the items the produce. Therefore, the lower
the PPI, the better companies can compete in the industry. If the PPI rises, it
becomes more difficult for operators in the industries to provide competitive
prices. However, for larger companies such as Kroger and Safeway, they can
keep their costs low through economies of scale. It is also moderately easy to
pass on the additional costs to the consumer.
Per Capita Disposable Income
Per Capita Disposable Income refers to the average amount of money each
person in the United States has to spend on goods and services, after taxes,
savings, and some non-tax payments are factored in. Per Capita Disposable
Income has a positive correlation with normal goods. While it has a moderate
effect on grocery store and supermarket sales, it has increasingly become a
larger factor, due to businesses providing more natural and organic foods, which
cost more. Consumers are willing to spend more on these premium products
because of their growing disposable income. Kroger has been capitalizing on
this growth with their Simple Truth and Simple Truth Organic products.
Competition
Competition in the Supermarket and Grocery Store industry is relatively high
due to large players in the space, as well as the fierce price competition and
Figure 7: Industry Segmentation
Source: IBIS World
19.10%
12.10%
11.40%
11.30%
8.40%
3.10%
2.20%
32.40%
Beverages Dairy Products Frozen Foods
Non-Food Items Fresh and Frozen Meat Drugs and Health Products
Fruit and Vegetables Other Food Items
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Figure 8: Total US Population
Source: FRED and UOIG Spreads
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Figure 9: Producer Price Index

UOIG 5
aggressive expansion. Additionally, the introduction of online markets has
increased competition as businesses are now able to reach a wider customer
base. While most of the companies in this industry operate in small local and
regional markets, there are a few large players that dominate the market.
It is estimated that four companies represented approximately 30% of revenue in
2014. Kroger leads these companies, with an estimated 15% market share. Its
largest competitors in the industry are Safeway and Publix, while Costco and
Wal-Mart are its largest competitors outside of the industry. Kroger has been
able to maintain its position through its large product offering, its commitment
to its customers, and its strategic acquisitions, which will be discussed later.
All of the major players in the industry have put a large focus on providing
natural and organic foods for their customers. Now that these natural and
organic foods are becoming more widespread, companies are going to have to
compete on price on these products as well. Traditionally, companies were able
to charge premiums for these foods, but they will be expected to compete on
price in the near future. Kroger owns a very large amount of bakeries, dairy
farms, and other farms that act as local manufacturers and distributors for the
surrounding stores. By owning many of these local manufacturers, they are able
to provide a greater amount of natural and organic foods, without having to
worry about the food products spoiling.
Going into the future, success in the industry will be determined by the
companies that can achieve economies of scale, capture greater market share
than its competitors, and provide a substantial amount of products to meet
consumer needs. Whichever company that is able to offer the lowest price for
comparable goods will attract the most customers, and will be able to enjoy the
greatest market share.
Strategic Positioning
Market Leader
Kroger is the leader in its industry, and continues to grow. Market share is a
very important part of their long-term strategy, and it is the best way to reflect
the success of its products with customers. In addition to increasing revenue
through market share, a greater market share allows Kroger to spread its fixed
costs out over a wider revenue base. To measure its market share, Kroger uses
Nielsen POS+ data. From this data, it is estimated that Kroger’s market share in
the markets in which it operates increased by 60 basis points in 2014. This is
compared to an estimated 50 basis points increase in 2013. Wal-Mart is one of
Kroger’s top two competitors in 15 of the 20 markets that are covered in the
Nielson Report. According to Nielsen, Kroger’s market share increased in all 15
of these markets. Overall, their market share increased in 18 of the markets and
decreased slightly in two of the markets. Kroger plans on growing their market
share in these markets going into the future through the establishment of new
stores, and possible acquisitions.
Merchandising and Manufacturing
Kroger is has one of the largest private label manufacturing networks in the
country. Kroger owns 37 manufacturing plants, which consists of 17 dairies,
nine deli or bakery plants, five grocery product plants, two beverage plants, two
meat plants and two cheese plants. These plants produce 40% of the food
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Figure 10: Consumer Price Index
Figure 11: Kroger Total Square Footage
Source: Kroger 10-K and UOIG Spreads
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Figure 12: Merchandising Costs
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UOIG 6
products sold by Kroger and its subsidiaries. The other 60% are produced by
outside manufacturers that follow strict guidelines. Kroger also recently opened
a new, state of the art dairy processing plant in Denver. It is the first dairy in the
United States to use robotic technology that enables Kroger to pack cases and
pick and palletize orders entirely by automation. It produces fresh and organic
milk, and will primarily distribute to Kroger stores in the central United States
Because they own so many of the plants that manufacture their goods, Kroger is
able to lower their manufacturing prices considerably. It also allows them to
ensure that their customers get the highest quality products. These
manufacturing plants are spread out all across the United States. This allows
Kroger to maintain the freshness of their products and reduce transportation
costs.
Acquisitions
On January 28, 2014, Kroger closed their merger with Harris Teeter
Supermarkets, Inc. (“Harris Teeter”) by buying 100% of Harris Teeter stock for
approximately $2.4 billion. This merger allows Kroger to establish itself in the
southeastern and mid-Atlantic markets, as well as Washington, D.C. Both the
southeastern and mid-Atlantic states, on average, have higher population growth
than the United States as a whole, which Kroger will now be able to capitalize
on. Gross margins increased in 2014 because of the merger with Harris Teeter,
which historically has had slightly larger margins than Kroger without Harris
Teeter.
From the merger with Harris Teeter, Kroger gained access to Harris Teeter’s
“click and collect” system, which allows customers to shop on line through
Harris Teeter’s website, and then pick up the products ordered at a nearby Harris
Teeter supermarket. This service has been extremely successful for Harris
Teeter, and Kroger has expanded the service for its Kroger Supermarkets in the
greater Cincinnati area. Kroger has been dabbling with online shopping with its
King Soopers stores in Denver, but now they want to make a big push through
Harris Teeter’s system. While it is still very early since Kroger rolled out the
system into its Kroger Supermarkets, management has had very positive
feedback and expects it to be very popular with consumers.
On August 18, 2014, Kroger closed its merger with Vitacost.com by purchasing
100% of the Vitacost.com outstanding common stock for $8.00 per share,
totaling approximately $287 million. Vitacost.com provides health and wellness
products sold directly through its website. It is a leading online retailer of these
products, and the merger with Vitacost.com gives Kroger access to extensive e-
commerce platform, which can be combined with Kroger’s resources and loyal
customer base, to create an even more personalized experience for customers.
Diversified Store Formats and Product Offerings
As mentioned earlier, Kroger has a variety of different store formats that span
across the United States, ranging from big box retail to convenient stores.
Furthermore, within these stores are a wide array of products that range from
value to premium. The geographic, store, and product diversification provides
Kroger with stable revenues that are protected from regional macroeconomic
trends. Furthermore, Kroger is able to capitalize on a wide array of customers
based on price. Going forward, Kroger will continue to fill their current
channels as well as expand into new markets. The dynamic and proven store
Figure 13: Capital Expenditures Projections
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Figure 14: EBITDA Projections
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Figure 15: Kroger Store Geographical Distribution
Source: Kroger 2013 Factbook

UOIG 7
formats will provide Kroger the ability to open the type of stores that cater best
to the region they occupy.
Business Growth Strategies
Geographic Growth
Kroger operates exclusively in the United States. They have over 3500 stores
and recently increased their presence in the southeast portion of the United
States, as well as the mid-Atlantic through their acquisition of Harris Teeter,
which closed in early 2014. The southeast United States is rapidly growing, and
has outpaced the population growth of the United States as a whole in the past
few years and is projected to keep this pace. Kroger’s sales success is greatly
determined by the amount of people that shop at their stores. Therefore, the fast
growing population of the southeast should bolster their revenue streams.
In early 2015, Kroger registered as a company in Hawaii, and recently registered
their pharmaceutical segment as well. Hawaii is currently home to chains such
as Albertson, Safeway, Wal-Mart, Japan-based Don Quijote, and various local
stores. However, since the Albertsons-Safeway merger, the future of the
Albertson’s stores in Hawaii has been uncertain, and provides an opportunity for
Kroger to expand its business. Kroger, with its pricing power and superior
management, should be able to compete and thrive in the Hawaiian market, even
with high rental rates and land costs. This expansion will boost sales and market
share.
Organic Growth
Kroger is the Supermarket and Grocery Store industry leader, and is committed
to maintain its position as such. Kroger management believes that the best way
for their business to grow is not through acquisitions or mergers, but through
organic growth and the development of its core operations. One way they are
fostering organic growth and operational efficiency is through the buying out of
their current leases. Kroger management believes that by buying out these
leases they will reduce costs in the long run, as well as provide more flexibility
with their stores. Kroger plans on increasing their capital expenditures in the
next few years in order to finance these lease buyouts. Additionally, they plan
to remodel stores in order to keep them up to date and attractive to customers.
Another way Kroger believes they can grow their business is through the
development of their store associates. They believe that by providing their
workers with good compensation and exceptional training, they can boost sales
and retain customers. Nationally, on average, Kroger associates make an
average $14 an hour, compared to $8.81 an hour for Wal-Mart associates. When
you include the benefits that Kroger provides its workers, this average is much
higher. By taking care of their associates, Kroger can better provide for its
customers and their needs, which ultimately leads to higher sales, better
margins, and increased customer loyalty.
Acquisitions and Online Retail
In 2014, Kroger closed two mergers: one with Harris Teeter Supermarkets, and
one with Vitacost.com. While the merger with Harris Teeter was primarily for
Kroger to expand its operations into the central and southeastern portions of the
Figure 16: 2013 Capital Investment Allocation
Source: Kroger 2013 Factbook
49%
19%
15%
3%
14%
Major Supermarket (including real estate)
Minor Supermarket
Supermarket Support (Tech & Logistics)
Other Retail
Other
Figure 17: Net Income vs. OG&A Expense
Source: Kroger 10-K
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Figure 18: OG&A Expense per Employee
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UOIG 8
east coast of the United States, Kroger also acquired its proprietary “click and
collect” online system. This system has been very successful at Harris Teeter
supermarkets, and Kroger is currently testing it at some of its supermarkets in
the greater Cincinnati area. Additionally, the merger with Vitacost.com allows
Kroger to expand its online offerings even more.
With many retail chains, such as Wal-Mart, Amazon, and Safeway expanding
their online retail services into fresh produce and food, it is very beneficial for
Kroger to expand as well. These services are relatively new in the Supermarket
and Grocery Store Industry, so by entering the market now, Kroger can leverage
its pricing power to attract customers through the reduction of delivery costs.
Many of Kroger’s competitors, such as Safeway, charge up to $14.99 in delivery
costs. Kroger is known for being able to provide the lowest price on quality
prices, and Kroger will be able to do the same with its online orders. By adding
these online retail options, Kroger can bring in more customers, and provide a
more personalized shopping experience.
Proliferation of Natural and Organic
A recent trend that has emerged in the United States is the natural and organic
foods trend. Coinciding with increased awareness in nutrition, many Americans
have begun to more actively seek out natural and organic groceries. Originally,
stores like Whole Foods, New Seasons, and Market of Choice enjoyed a first-
mover’s advantage, offering unique natural products and brands in which
consumers were willing to pay a premium for. However, in the last two years,
Kroger has also been able to capitalize on this trend by offering some of the
same brands that Whole Foods and other organic stores offer. Furthermore,
Kroger has also created a private label, known as “Simple Truth,” which has
seen sales rise to $1.2 billion in 2014, just two years after launch. Where
previously consumers had to pay a premium to access organic and natural foods,
the introduction of Simple Truth and other brands allows consumers to access
comparable foods at a much lower price. The success of Simple Truth and
Kroger’s other private labels are a significant driver of revenue and allow
Kroger to take market share away from Whole Foods and other comparable
stores. Going forward, Kroger will continue to develop their brands in order to
maintain and capitalize on this growing trend.
Management and Employee Relations
W. Rodney McMullen – Chairman and CEO
Rodney McMullen is the current Chairman and CEO of Kroger. He joined
Kroger in 1978 as a part-time stock clerk in Lexington, KY. Before his current
position, he was the President and the Chief Operating Officer. He was named
Chairman of the Board earlier this year. Mr. McMullen earned a bachelor’s
degree in Accounting, a B.B.A. in Finance, and a master’s degree in Accounting
from the University of Kentucky.
Michael L. Ellis – President and COO
Mike Ellis is currently the President and Chief Operating Officer of Kroger.
Mike joined Fred Meyer at the age of 16, and has advanced through the ranks up
to his current position. Prior to President and COO, he was the senior vice
president of Kroger’s retail divisions.
Figure 19: Key Management Compensation vs.
Net Income
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Figure 20: EPS Guidance vs. Actuals
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UOIG 9
J. Michael Schlotman – Senior Vice President and CFO
Mike Schlotman is currently the Senior Vice President and Chief Financial
Officer of Kroger. Mike joined Kroger in 1985, and has held a variety of
leadership positions. He was named group vice president and chief financial
officer in 2000, and was named senior vice president in 2003. Mike earned his
bachelor’s degree in Accounting from the University of Kentucky
Geoffrey J. Covert – Senior Vice President
Geoffrey Covert is the current Senior Vice President of Kroger. He joined
Kroger in 1996 as vice president of the Grocery Products Group. In 2010, Geoff
was promoted to senior officer of Kroger’s Retail Operations at General Office.
He was named to his current role in 2012. Before Kroger, Geoff worked for 22
years in various management positions at Procter & Gamble Co. He received
his bachelor’s degree in Chemical Engineering at Case Western Reserve
University.
Management Guidance
Management provides guidance on revenue and EPS for their operations in each
fiscal year. Management does not break out their revenue into segments, but
instead reports total sales. In recent years, management has consistently met, or
beaten their guidance. The revenue model is slightly above management
guidance, due to management’s trend to provide beatable guidance. For the
fiscal year of 2015, management estimates EPS will between $3.80 and $3.90 a
share and sales will be between $111.7 billion and $112.8 billion.
Portfolio Strategy
Kroger is not currently held in any of the University of Oregon Investment
Group’s portfolios. At the moment, the Tall Firs portfolio is underweight in
large cap stocks and overweight in consumer goods. While Tall Firs is
overweight in Consumer Goods, the portfolio would benefit from additional
exposure and diversity to the food and grocery space. Currently, Costco is the
only holding that provides this exposure. By adding Kroger to the portfolio, Tall
Firs would be better aligned with the market capitalization distribution of the
benchmark. Even though Tall Firs is overweight consumer goods, the strong
management, consistent top- and bottom-line growth, and its position as a
market leader make Kroger a very attractive value buy.
Recent News
Wal-Mart and Target Are Being Crushed by Supermarkets in
the Business of Selling Food – TheStreet – Friday April 17th
2015
Traditional supermarkets like Kroger and Safeway are outperforming mass
merchants like Wal-Mart and Target in selling fresh food and packaged goods.
In the past year, Kroger posted double digit same-store sales growth, leading to
investors pushing up Kroger’s stock price by 66% in the past year, compared to
3.2% and 36% increases by Wal-Mart and Target, respectively.
Select pieces of important current news and state explicitly how they affect your
company, its stock price, and/or the industry.
Figure 21: Revenue Regression Projections
0
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CPI PPI US Population
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Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15
Figure 22: Kroger 1 Year Stock Chart
Source: Yahoo Finance
Figure 23: US Disposable Income per Capita
Source: FRED
30000
31000
32000
33000
34000
35000
36000
37000
38000
39000
2000 2002 2004 2006 2008 2010 2012 2014
Dollars

UOIG 10
Kroger Honored by EPA as a 2015 ENERGY STAR® Partner
of the Year – PR Newswire – Wednesday April 8th, 2015
Kroger was recognized as an ENERGY STAR® Partner by the EPA for its
outstanding efforts and actions to improve the energy efficiency of its buildings
and facilities. Kroger has been an ENERGY STAR® Partner since 2010. Some
key factors in Kroger’s energy management program include the
implementation of best practices for refrigeration, lighting, and HVAC,
extensive use of LED lighting in refrigerated cases, and enhanced associate and
customer awareness. Since 2000, Kroger has reduced its average grocery store
electricity usage by 35%.
Catalysts
Upside
Future acquisitions in the United States, particularly in fast growing
urban areas, would allow Kroger to further increase their revenue
streams and national market share
Faster than anticipated adoption of online grocery technology would
allow Kroger to further capitalize on their early position within this
market
As the American market, particularly lower and middle-income
consumers, continue to adopt natural and organic groceries, Kroger’s
established and fast-growing natural and organic brands will allow the
company to further their customer base and capture additional market
share against competitors
Downside
Unexpectedly heightened levels of competition could force Kroger to
further compete on price in order to maintain market, ultimately
resulting in deteriorated margins and reduced free cash flow
Unprecedented disputes between Kroger and their employees could
result in temporarily halted operations that could potentially tarnish the
brand image and result in the loss of customers
Failure to acquire additional grocery chains could result in the loss of
lucrative urban areas and slower than anticipated growth in the coming
years
Comparable Analysis
Kroger is the largest grocer in the United States, operating in over 36 states.
While there are other conglomerates of grocery stores in the United States, most
of these firms are dramatically smaller than Kroger. As a result, the comparable
universe was expanded to include companies in the general food and retail
space. The primary criteria used to screen for comparable companies was size,
revenue and EBITDA growth, operating margins, and a general exposure to the
grocery and food space. Considering the maturity of the industry and the firms
within, EV/EBITDA and P/E were the primary metrics used for benchmarking.
The rationale for EV/EBITDA is primarily that it provides investors with the
truest sense of operational efficiency and cash flows. The rationale for P/E is
Figure 24: US Unemployment Rate
Source: FRED
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
2000 2002 2004 2006 2008 2010 2012 2014
PercentageUnemployed
Figure 25: Costco 1 Year Stock Chart
0
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Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15

UOIG 11
that the maturity of the company and the steadiness of the cash flows make it an
attractive metric for institutional investors and should thus be considered in our
valuation.
COST: Costco Company (35%)
“The company, formerly known as Costco Companies, Inc., was founded in
1976 and is based in Issaquah, Washington. Costco Wholesale Corporation,
together with its subsidiaries, operates membership warehouses. The company
offers branded and private-label products in a range of merchandise categories.
It provides dry and institutionally packaged foods; snack foods, candy, tobacco,
alcoholic and nonalcoholic beverages, and cleaning and institutional supplies;
appliances, electronics, health and beauty aids, hardware, garden and patio, and
office supplies; meat, bakery, deli, and produce; and apparel, small appliances,
and home furnishings. The company also operates gas stations, pharmacies, food
courts, optical dispensing centers, photo processing centers, and hearing-aid
centers; and engages in the travel business.” -Yahoo! Finance
Qualitatively, Costco and Kroger are both large-scale, mature grocers operating
primarily in the United States. While Costco is a warehouse club, requiring a
yearly payment for membership, the two companies directly compete for
consumers and offer many of the same products, including both grocery
products as well as fuel services. Furthermore, both companies compete directly
on price with consumers. Apart from the warehouse membership, Kroger and
Costco have relatively similar business models and similar exposure to
macroeconomic factors, especially in the United States.
Quantitatively, Costco and Kroger are relatively comparable in size, both having
market capitalizations and enterprise values exceeding $35 billion. Revenue and
EBITDA growth is also relatively in line for the two firms. Finally, Kroger and
Costco have very comparable margins.
Comparable business models, similar product offers, direct competition,
comparable margins, and similar exposure to macroeconomic trends are all
factors considered in a 35% weighting of Costco.
SYY: Sysco Company (35%)
“Sysco Corporation, through its subsidiaries, markets and distributes a range of
food and related products primarily to the foodservice or food-away-from-home
industry. It operates in Broadline and SYGMA segments. The company
distributes a line of frozen foods, such as meats, seafood, fully prepared entrees,
fruits, vegetables, and desserts; a line of canned and dry foods; fresh meats;
dairy products; beverage products; imported specialties; and fresh produce. The
company offers its products to the restaurants, hospitals and nursing homes,
schools and colleges, hotels and motels, industrial caterers, and other
foodservice customers through distribution facilities.”
Qualitatively, Sysco and Kroger both operate in the United States and provide
general food products. Both companies have considerable exposure to the food
space within the United States. Sysco does have operations outside of the
United States but their primary operations are within the U.S.
Quantitatively, Sysco is approximately 3/5ths the size of Kroger in both market
capitalization and enterprise value. Both companies have similar volatility and
very comparable Debt/EV. In terms of growth, Sysco and Kroger are directly in
Figure 26: Kroger vs. Costco
Source: UOIG Spreads
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
% Revenue
Growth
2015E
% Revenue
Growth
2016E
% EBITDA
Growth
2015E
% EBITDA
Growth
2016E
% EPS
Growth
2015E
% EPS
Growth
2016E
PercentageGrowth
Kroger Co. Costco Whole Sale
Figure 27: Kroger Margin Projections
20.00%
20.20%
20.40%
20.60%
20.80%
21.00%
21.20%
21.40%
2015E 2017E 2019E 2021E 2023E
GrossMargin
Figure 28: Sysco 1 Year Stock Chart
0
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$40.00
$41.00
$42.00

UOIG 12
line in terms of Revenue, EBIT, and EBITDA going into the NTM. In terms of
margins, Kroger and Sysco have very comparable margins across the board.
As a result of similar exposure to the United States food space, size, volatility,
capital structures, growth prospects and margins, Sysco received a 35%
weighting.
WMT: Wal-Mart Stores (20%)
“The company was founded in 1945 and is headquartered in Bentonville,
Arkansas. Wal-Mart Stores, Inc. operates retail stores in various formats
worldwide. The company operates through three segments: Walmart U.S.,
Walmart International, and Sam’s Club. It operates discount stores,
supermarkets, supercenters, hypermarkets, warehouse clubs, cash and carry
stores, home improvement stores, specialty electronics stores, restaurants,
apparel stores, drug stores, and convenience stores, as well as retail Websites,
such as walmart.com and samsclub.com.” –Yahoo! Finance
Qualitatively, Walmart and Kroger are both large-scale retailers that operate
primarily in the United States. Walmart currently has some international
operations and will continue to look for opportunities to expand. Kroger
currently only operates in the United States and currently has no plans to expand
outside of the United States. While Kroger primarily offers grocery products,
Wal-Mart has a more diversified offering of products, including grocery
products. Both Kroger and Wal-Mart have various store formats and generally
compete over the same consumer through price and promotion.
Quantitatively, Walmart is dramatically larger than Kroger in terms of market
capitalization and enterprise value. The two companies share similar betas.
Margins are relatively similar for the two firms and growth prospects are both
representative of mature companies within the space.
Due to the massive size disparity between Walmart and Kroger and different
product offers, Wal-Mart received only a 20% weighting in the comparable
valuation.
TGT: Target Company (5%)
“Target Corporation was founded in 1902 and is headquartered in Minneapolis,
Minnesota. Target Corporation operates as a general merchandise retailer in the
United States and Canada. It offers household essentials, including pharmacy,
beauty, personal care, baby care, cleaning, and paper products; music, movies,
books, computer software, sporting goods, and toys; electronics, such as video
game hardware and software; and apparel for women, men, boys, girls, toddlers,
infants, and newborns, as well as intimate apparel, jewelry, accessories, and
shoes. The company also provides food comprising dry grocery, dairy, frozen
food, beverages, candy, snacks, deli, bakery, meat, produce, and pet supplies” –
Yahoo! Finance
Qualitatively, Target and Kroger are both large-scale retail companies that offer
grocery products. While Target does have a wider array of other product
offerings, the two companies have similar business models and appeal to similar
consumers. Furthermore, both Kroger and Target primarily operate in the
United States and this trend will continue as Target continues to exit Canada.
Quantitatively, Target and Kroger have very similar market capitalizations and
enterprise values as well as comparable betas. Going into 2015 and 2016, both
Figure 30: Wal-Mart 1 Year Stock Chart
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% Revenue
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% EPS
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PercentageGrowth
Figure 29: Kroger vs. Sysco

UOIG 13
firms have comparable growth prospects. However, the two companies have
different margins, particularly in EBIT and EBITDA.
Target and Kroger are comparable in size, business model, geographic
operations, and product offerings. However, considering varying margins,
Target was weighted 5%.
WFM: Whole Foods Market (5%)
“Whole Foods Market, Inc. operates as a retailer of natural and organic foods.
The company’s stores offer produce and floral, grocery, meat, seafood, bakery,
prepared foods and catering, coffee, tea, beer, wine, cheese, nutritional
supplements, vitamins, and body care products, as well as lifestyle products,
including books, pet products, and household products. As of November 5,
2014, the company had 401 stores in the United States, Canada, and the United
Kingdom. Whole Foods Market, Inc. was founded in 1978 and is headquartered
in Austin, Texas”
Qualitatively, Whole Foods and Kroger both operate throughout the United
States and offer grocery products. Whole Foods is generally categorized as a
premium natural and organic foods supplier whereas Kroger is more of a general
grocer. However, a recent trend within Kroger’s stores has been natural and
organic foods produced under their Simple Truth brand, growing to $1.2 billion
in sales in just two years. That being said, there is still a considerable difference
in the type of consumers that Whole Foods and Kroger attracts.
Quantitatively, Whole Foods is approximately half the size of Kroger, has
widely varying margins, and much larger growth rates in the next years.
Considering the qualitative and quantitative factors listed above, Whole Foods
has received a 5% weighting.
Discounted Cash Flow Analysis
Revenue Model
The revenue model was created by first calculating historical revenue per square
foot. From there, revenue per square foot was projected out using a Multiple
Linear Regression model. Various factors were screened for the model. Such
factors were Total US Population, Average Disposable Income Per Capita,
National Unemployment Rate, the Producer Price Index, and the Consumer
Price Index. From there, multicollinearity tests were conducted to choose the
proper inputs for the regression.
After running various tests, it was found that Total US Population, the Producer
Price Index, and the Consumer Price Index would be the best predictors of
future revenue per square foot. Instead of including all of these factors in one
regression, however, three separate regressions were used with only one of these
factors, because of the multicollinearity and high standard errors that occurred
when including all 3 factors in one regression. Each of these three regressions
also include three dummy variables that controlled for effects caused by
seasonality.
Once the regression statistics were calculated with each factor, revenue per
square foot was projected into 2024. Total square footage was also projected
out using historical data, management guidance, and a Simple Linear
Regression. This was also forecasted into 2024. To calculate total revenue,
Figure 32: Whole Foods 1 Year Stock Chart
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Figure 33: Kroger vs. Whole Foods
0.00%
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% Revenue
Growth
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PercentageGrowth
Figure 34: Regression Weighting
Multiple Weight
CPI Regression 33.33%
PPI Regression 33.33%
US Population Regression 33.33%

UOIG 14
each of values of revenue per square foot were multiplied by their respective
total square footage during that quarter. From there, all four quarters of each
year were summed up to produce the total revenue of the year.
For the final revenue model, a weighted average of the revenue models
produced by each of the regressions was used. This allowed the final revenue
model to contain each of the inputs while maintaining a high adjusted R-squared
and minimizing standard errors.
Cost of Goods Sold
Cost of goods sold were projected to slightly increase from 78.74% in 2014 to
79.00% of revenue in the terminal year. The slight increase in cost of goods
sold is meant to reflect a competitive landscape and potential price competition
that will emerge from the recent markets Kroger has entered. Considering that
price is a primary factor in consumers’ decision, Kroger will continue to heavily
compete on price. However, while Kroger will continue to invest in prices, this
increase in cost of goods sold is off-set by the successful implementation of in-
house private brands, including Simple Truth, which have amassed $1.2 billion
in the two mere years since entering Kroger stores.
Operating Expenses
Operating, General and Administrative (OG&A) Expenses:
Operating, General, and Administrative expenses are primarily composed of
employee wages, salaries and benefits. Comparing 2012 to 2014, OG&A
expense as a percentage of revenue has increased by about 50 basis points. In
2012, Kroger re-crafted their strategic plan, shifting towards a more employee
focused direction. The results have, notable in their sales and market
performance, paid off. Kroger has stated that they will continue to move in this
direction as it has been very successful. As a result, we have OG&A increasing
slightly as a percentage of revenue going into the terminal year.
Depreciation and Amortization:
Depreciation and Amortization was projected out as a percentage of beginning
plant, property and equipment. Historical averages were used to determine the
rate as the last 5-years have produced a close band of percentages between
11.42% and 11.58%.
Rent:
Rent is projected to continue to decrease as a percentage of revenue going into
the terminal year as Kroger has recently adopted the philosophy of owning the
land their stores operate on. As noted in the capital expenditures, as Kroger
continues to purchase the leases and land, rent expense as percentage of revenue
will continue to decrease.
Net Working Capital
Working Capital was primarily projected off historical averages and days
outstanding. Two exceptions are accounts receivable and accounts payable
which have shown an increasing and decreasing trend in the past five years. The
models reflect these trends.
Figure 35: CPI Regression Statistics
Multiple R 0.97
R Square 0.94
Adjusted R Square 0.94
Standard Error 7.20
Observations 60
Figure 36: PPI Regression Statistics
Multiple R 0.98
R Square 0.96
Standard Error 6.29
Observations 60
Figure 37: US Population Regression Statistics
Multiple R 0.96
R Square 0.93
Standard Error 8.10
Observations 60
Figure 38: Beta Table
Beta SE Weighting
1-Year Daily 0.65 0.08 0.00%
3-Year Daily 0.76 0.05 15.00%
5-Year Daily 0.63 0.03 25.00%
10-Year Daily 0.60 0.02 20.00%
15-Year Daily 0.58 0.02 15.00%
25-Year Daily 0.66 0.02 12.50%
38-Year Daily 0.69 0.02 5.00%
5-Year Weekly 0.58 0.07 0.00%
10-Year Weekly 0.55 0.05 2.50%
Kroger Co. Beta 0.64

UOIG 15
Capital Expenditures
Capital expenditures primarily consists of costs associate with building new
stores, revamping older stores, and purchasing leases and land. Capital
expenditures are modeled to increase by 14 basis points as a percentage of
revenue in 2018 before trending back towards historical averages. In recent
years Kroger has adopted the philosophy of owning their stores and will
continue to buy-out leases in the coming years.
Beta
The estimated beta for Kroger Company is 0.64. The beta was calculated by
calculating the weighted averages of the Vasicek, Hamada, and regressed betas.
For regressions, the S&P 500 was used as Kroger is a large-cap company. 3, 5,
10, 15, 25, and 38-year dailies were used as well as a 10 year weekly. Each of
the above regressions yielded a close band of betas ranging from 0.55 to 0.76.
Standard errors were the primary criteria used to determine weightings for the
regressions. The weighting of shorter-term and longer-term regressions is
appropriate as it provides both a long-term picture of the stability and
matureness while also reflecting more contemporary evolutions of the industry.
The close band of regressed betas, from both short and long-term periods,
corroborates this.
Hamada and Vasicek betas were also calculated using both comparable
companies and ETFs. The calculated betas were not weighted as the companies
included within our comps and our ETFs are drastically different in both size
and business operations. While they do provide insight into the large industry as
a whole, the regressed betas offer a tight range of betas that are more reflective
of Kroger’s true beta.
Tax Rate
The tax rate was determined using primarily management guidance. Previously
the tax rate has been slightly below the 35% US Corporate tax rate as tax breaks
and credits have been used. However, these breaks and credits are largely
unpredictable and therefore for the sake of conservatism, the US Corporate tax
rate was used.
Cost of Debt
Cost of debt was determined by using a weighted average of current rates on
Kroger’s outstanding debt.
Recommendation
As the leader in its industry and a provider of quality service and products,
Kroger is a strong value play. With consistent revenue growth, strong
management, a commitment to customer service and quality, as well as its
geographic expansion and online retail development, Kroger is poised to
continue its success and even increase its market share. Additionally, its
increased organic and natural offerings will spur revenue and increase its market
share. A weighting of 75% was given to the Discounted Cash Flow Analysis,
while a weighting of 25% was given to the Comparable Analysis, giving a final
Figure 41: Share Sensitivity Table
Figure 40: Tax Rate Sensitivity Table
Figure 39: Beta Sensitivity Table
Undervalued/(Overvalued)
Terminal Growth Rate
0 2.0% 2.5% 3.0% 3.5% 4.0%
0.60 (8.98%) 5.86% 26.50% 57.12% 107.30%
0.62 (12.52%) 1.35% 20.43% 48.34% 93.06%
0.64 (15.88%) (2.90%) 14.79% 40.31% 80.37%
0.66 (19.07%) (6.91%) 9.52% 32.94% 68.99%
0.68 (22.10%) (10.69%) 4.60% 26.14% 58.73%
AdjustedBeta
0 2.0% 2.5% 3.0% 3.5% 4.0%
25% (19.51%) (7.45%) 8.81% 31.94% 67.48%
30% (17.72%) (5.21%) 11.74% 36.03% 73.73%
35% (15.88%) (2.90%) 14.79% 40.31% 80.37%
40% (13.99%) (.51%) 17.96% 44.81% 87.44%
45% (12.03%) 1.97% 21.26% 49.53% 94.97%
TaxRate
0 2.0% 2.5% 3.0% 3.5% 4.0%
482 (12.32%) 1.21% 19.65% 46.25% 88.01%
492 (14.10%) (.85%) 17.21% 43.28% 84.19%
502 (15.81%) (2.82%) 14.88% 40.43% 80.52%
512 (17.46%) (4.72%) 12.64% 37.68% 76.99%
522 (19.04%) (6.55%) 10.48% 35.05% 73.60%
Outstanding
Shares

UOIG 16
price target of $83.47, implying an undervaluation of 18.31%. Because of this
price target, it is recommended that Kroger will outperform and should be added
to the Tall Firs portfolio.
Figure 42: Final Price Target
Source Implied Price Weighting
Discounted Cash Flow Analysis $80.98 75%
Comparable Analysis 90.93 25%
Weighted Implied Price $83.47
Current Price $70.55
Undervalued 18.31%

UOIG 17
Appendix 1 – Comparable Analysis
Comparables Analysis KR TGT WFM WMT SYY COST
($ in millions) Kroger Co. Target Co.
Whole Foods
Market, Inc.
Wal-Mart
Stores, Inc. Sysco Co.
Costco Whole
Sale
Stock Characteristics Max Min Median Weight Avg. 5.00% 5.00% 20.00% 35.00% 35.00%
Current Price $148.96 $37.77 $79.24 $87.91 $70.55 $83.15 $50.99 $79.24 $37.77 $148.96
Beta 0.96 0.53 0.71 0.68 0.64 0.65 0.96 0.53 0.71 0.71
Size
Short-TermDebt 6,689.00 2.00 311.35 1,871.42 1,885.00 91.00 2.00 6,689.00 311.35 1,200.00
Long-TermDebt 43,692.00 60.00 7,248.46 13,254.11 9,771.00 12,705.00 60.00 43,692.00 7,248.46 3,830.00
Cash and Cash Equivalent 9,135.00 852.00 4,907.68 6,306.34 1,256.00 2,210.00 852.00 9,135.00 4,907.68 7,453.00
Non-Controlling Interest 4,543.00 - 34.94 997.48 30.00 - - 4,543.00 34.94 219.00
Preferred Stock - - - - - - - - - -
Diluted Basic Shares 3,243.00 370.50 592.34 1,060.44 502.41 640.10 370.50 3,243.00 592.34 439.97
Market Capitalization 256,975.32 18,891.80 53,224.32 85,769.84 35,163.48 53,224.32 18,891.80 256,975.32 22,372.79 65,538.57
Enterprise Value 302,764.32 18,101.80 63,334.57 95,586.52 45,593.48 63,810.32 18,101.80 302,764.32 25,059.85 63,334.57
Growth Expectations
% Revenue Growth 2015E 10.93% 1.38% 5.01% 4.64% 4.94% 2.28% 10.93% 1.38% 5.01% 5.58%
% Revenue Growth 2016E 11.23% 2.72% 3.35% 4.61% 4.60% 2.72% 11.23% 3.06% 3.35% 6.09%
% EBITDA Growth 2015E 11.79% -0.54% 7.22% 6.93% 4.51% 7.22% 9.52% -0.54% 5.94% 11.79%
% EBITDA Growth 2016E 10.62% 2.98% 7.90% 7.04% 4.18% 3.57% 10.62% 2.98% 8.50% 7.90%
% EPS Growth 2015E 11.46% -3.17% 6.76% 4.78% 10.24% 6.76% 11.46% -3.17% 6.10% 6.77%
% EPS Growth 2016E 11.84% 5.28% 8.88% 8.26% 10.52% 9.15% 11.84% 5.28% 8.70% 8.88%
Profitability Margins
Gross Margin 35.20% 11.47% 24.31% 18.06% 21.15% 26.45% 35.20% 24.31% 17.45% 11.47%
EBIT Margin 7.54% 2.85% 5.42% 4.17% 2.85% 7.54% 6.47% 5.42% 3.77% 3.05%
EBITDA Margin 10.48% 3.97% 7.37% 5.57% 4.67% 10.48% 9.13% 7.37% 4.94% 3.97%
Net Margin 4.00% 1.58% 3.20% 2.49% 1.58% 3.37% 4.00% 3.20% 2.27% 1.95%
Credit Metrics
Interest Expense $2,487.00 $0.00 $134.00 $615.45 $487.00 $632.00 $0.00 $2,487.00 $134.00 $113.00
Debt/EV 0.30 0.00 0.17 0.18 0.26 0.20 0.00 0.17 0.30 0.08
Leverage Ratio 3.03 0.04 1.39 1.79 2.12 1.76 0.04 1.39 3.03 1.04
Interest Coverage Ratio 42.86 0.00 10.73 24.06 11.27 8.02 0.00 10.73 18.62 42.86
Operating Results
Revenue $492,348.80 $15,745.98 $74,276.89 $163,379.50 $112,500.00 $74,276.89 $15,746 $492,348.80 $50,506.00 $122,090.00
Gross Profit $119,672.34 $5,542.47 $14,002.00 $33,293.74 $23,797.00 $21,944.92 $5,542 $119,672.34 $8,812.00 $14,002.00
EBIT $26,690.31 $1,018.64 $3,718.00 $7,609.71 $3,444.00 $5,067.39 $1,019 $26,690.31 $1,903.00 $3,718.00
EBITDA $36,272.51 $1,437.70 $4,843.00 $10,257.35 $5,489.00 $7,253.35 $1,438 $36,272.51 $2,495.00 $4,843.00
Net Income $15,772.28 $629.16 $2,375.00 $4,562.26 $1,904.00 $2,858.94 $629 $15,772.28 $1,149.00 $2,375.00
Capital Expenditures $12,292.97 $572.00 $2,140.56 $3,677.59 $3,077.00 $2,140.56 $770 $12,292.97 $572.00 $2,495.00
Multiples
EV/Revenue 1.15x 0.41x 0.61x 0.58x 0.41x 0.86x 1.15x 0.61x 0.50x 0.52x
EV/Gross Profit 4.52 1.92 2.91 3.39 1.92 2.91 3.27 2.53 2.84 4.52
EV/EBIT 17.77 11.34 13.17 14.36 13.24 12.59 17.77 11.34 13.17 17.03
EV/EBITDA 13.08 8.31 10.04 10.83 8.31 8.80 12.59 8.35 10.04 13.08
EV/(EBITDA-Capex) 27.13 12.48 13.03 18.51 18.90 12.48 27.13 12.63 13.03 26.97
Market Cap/Net Income = P/E 30.03 16.29 19.47 22.16 18.47 18.62 30.03 16.29 19.47 27.60
Multiple Implied Price Weight
EV/Revenue 108.87 0.00%
EV/Gross Profit 140.02 0.00%
EV/EBIT 77.72 20.00%
EV/EBITDA 97.64 60.00%
EV/(EBITDA-Capex) 68.15 0.00%
Market Cap/Net Income = P/E 84.00 20.00%
Price Target $90.93
Current Price 70.55
Undervalued 28.88%

UOIG 18
Appendix 2 – Discounted Cash Flows Valuation
DiscountedCash FlowAnalysis
($ in millions) 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E
Total Revenue $82,189.00 $90,374.00 $96,751.00 $98,375.00 $108,465.00 $113,818.52 $119,057.50 $124,404.90 $129,861.27 $135,427.16 $141,103.15 $146,889.79 $152,787.66 $158,797.35 $164,919.44
% YoY Growth 7.11% 9.96% 7.06% 1.68% 10.26% 4.94% 4.60% 4.49% 4.39% 4.29% 4.19% 4.10% 4.02% 3.93% 3.86%
Cost of Goods Sold 63,803.00 71,389.00 76,726.00 78,138.00 85,512.00 $89,751.03 $93,901.44 98,139.08 102,464.44 106,877.99 111,380.24 115,971.69 120,652.85 125,424.24 130,286.36
% Revenue 77.63% 78.99% 79.30% 79.43% 78.84% 78.85% 78.87% 78.89% 78.90% 78.92% 78.94% 78.95% 78.97% 78.98% 79.00%
Gross Profit $18,386.00 $18,985.00 $20,025.00 $20,237.00 $22,953.00 $24,067.49 $25,156.05 $26,265.81 $27,396.83 $28,549.17 $29,722.91 $30,918.10 $32,134.81 $33,373.12 $34,633.08
Gross Margin 22.37% 21.01% 20.70% 20.57% 21.16% 21.15% 21.13% 21.11% 21.10% 21.08% 21.06% 21.05% 21.03% 21.02% 21.00%
Operating, General and Adminstrative 13,823.00 15,345.00 14,849.00 15,196.00 17,161.00 18,056.77 18,938.90 19,842.81 20,768.73 21,716.89 22,687.52 23,680.85 24,697.12 25,736.56 26,799.41
% Revenue 16.82% 16.98% 15.35% 15.45% 15.82% 15.86% 15.91% 15.95% 15.99% 16.04% 16.08% 16.12% 16.16% 16.21% 16.25%
Depreciation and Amortization 1,600.00 1,638.00 1,652.00 1,703.00 1,948.00 2,065.51 2,198.11 2,337.29 2,483.07 2,635.50 2,777.73 2,910.34 3,033.84 3,148.64 3,255.07
% of Beginning PP&E 11.58% 11.58% 11.42% 11.47% 11.53% 11.53% 11.53% 11.53% 11.53% 11.53% 11.53% 11.53% 11.53% 11.53% 11.53%
Rent 623.00 619.00 628.00 613.00 707.00 696.16 680.36 660.93 637.74 610.66 579.55 544.30 504.76 460.80 412.30
% Revenue 0.76% .68% .65% .62% .65% .61% .57% .53% .49% .45% .41% .37% .33% .29% .25%
Earnings Before Interest & Taxes $2,340.00 $1,383.00 $2,896.00 $2,725.00 $3,137.00 $3,249.06 $3,338.68 $3,424.78 $3,507.28 $3,586.12 $3,678.11 $3,782.61 $3,899.09 $4,027.12 $4,166.31
% Revenue 2.85% 1.53% 2.99% 2.77% 2.89% 2.85% 2.80% 2.75% 2.70% 2.65% 2.61% 2.58% 2.55% 2.54% 2.53%
Interest Expense 448.00 435.00 462.00 443.00 488.00 480.00 535.76 559.82 584.38 609.42 634.96 661.00 687.54 714.59 742.14
% of Revenue 0.55% .48% .48% .45% .45% .48% .48% .48% .48% .48% .48% .48% .48% .48% .48%
Earnings Before Taxes 1,892.00 948.00 2,434.00 2,282.00 2,649.00 2,769.06 2,802.93 2,864.96 2,922.91 2,976.70 3,043.14 3,121.60 3,211.55 3,312.53 3,424.17
% Revenue 2.30% 1.05% 2.52% 2.32% 2.44% 2.43% 2.35% 2.30% 2.25% 2.20% 2.16% 2.13% 2.10% 2.09% 2.08%
Less Taxes (Benefits) 601.00 247.00 794.00 751.00 902.00 969.17 981.02 1,002.73 1,023.02 1,041.84 1,065.10 1,092.56 1,124.04 1,159.39 1,198.46
TaxRate 31.77% 26.05% 32.62% 32.91% 34.05% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00% 35.00%
Net Income $1,291.00 $701.00 $1,640.00 $1,531.00 $1,747.00 $1,799.89 $1,821.90 $1,862.22 $1,899.89 $1,934.85 $1,978.04 $2,029.04 $2,087.51 $2,153.15 $2,225.71
Net Margin 1.57% .78% 1.70% 1.56% 1.61% 1.58% 1.53% 1.50% 1.46% 1.43% 1.40% 1.38% 1.37% 1.36% 1.35%
Add Back: Depreciation and Amortization 1,600.00 1,638.00 1,652.00 1,703.00 1,948.00 2,065.51 2,198.11 2,337.29 2,483.07 2,635.50 2,777.73 2,910.34 3,033.84 3,148.64 3,255.07
Add Back: Interest Expense*(1-TaxRate) 305.69 321.66 311.29 297.21 321.83 312.00 348.24 363.88 379.84 396.12 412.73 429.65 446.90 464.48 482.39
Operating Cash Flow $3,196.69 $2,660.66 $3,603.29 $3,531.21 $4,016.83 $4,177.39 $4,368.25 $4,563.39 $4,762.81 $4,966.48 $5,168.50 $5,369.04 $5,568.26 $5,766.27 $5,963.17
% Revenue 3.89% 2.94% 3.72% 3.59% 3.70% 3.67% 3.67% 3.67% 3.67% 3.67% 3.66% 3.66% 3.64% 3.63% 3.62%
Current Assets 6,130.00 6,351.00 6,766.00 7,471.00 7,655.00 8,130.60 8,513.96 8,905.89 9,306.45 9,715.70 10,133.71 10,560.54 10,996.27 11,440.95 11,933.77
% Revenue 7.46% 7.03% 6.99% 7.59% 7.06% 7.14% 7.15% 7.16% 7.17% 7.17% 7.18% 7.19% 7.20% 7.20% 7.24%
Current Liabilities 7,482.00 7,790.00 8,327.00 9,048.00 9,518.00 9,921.76 10,341.34 10,746.88 11,160.74 11,578.96 12,001.44 12,430.12 12,864.85 13,305.48 13,751.86
% Revenue 9.10% 8.62% 8.61% 9.20% 8.78% 8.72% 8.69% 8.64% 8.59% 8.55% 8.51% 8.46% 8.42% 8.38% 8.34%
Net Working Capital ($1,352.00) ($1,439.00) ($1,561.00) ($1,577.00) ($1,863.00) ($1,791.16) ($1,827.37) ($1,840.98) ($1,854.29) ($1,863.26) ($1,867.73) ($1,869.58) ($1,868.58) ($1,864.52) ($1,818.09)
% Revenue (1.64%) (1.59%) (1.61%) (1.60%) (1.72%) (1.57%) (1.53%) (1.48%) (1.43%) (1.38%) (1.32%) (1.27%) (1.22%) (1.17%) (1.10%)
Change in Working Capital - ($87.00) ($122.00) ($16.00) ($286.00) $71.84 ($36.21) ($13.61) ($13.31) ($8.97) ($4.47) ($1.85) $1.00 $4.06 $46.43
Capital Expenditures 1,919.00 1,898.00 2,062.00 2,330.00 2,831.00 3,010.55 3,190.78 3,377.61 3,571.18 3,625.12 3,673.78 3,716.92 3,754.33 3,785.77 3,811.01
% Revenue 2.33% 2.10% 2.13% 2.37% 2.61% 2.65% 2.68% 2.72% 2.75% 2.68% 2.60% 2.53% 2.46% 2.38% 2.31%
Acquisitions 7.00 51.00 122.00 2,344.00 252.00 204.87 214.30 223.93 233.75 243.77 253.99 264.40 275.02 285.84 296.85
% Revenue 0.01% .06% .13% 2.38% .23% .18% .18% .18% .18% .18% .18% .18% .18% .18% .18%
UnleveredFree Cash Flow $1,270.69 $798.66 $1,541.29 -$1,126.79 $1,219.83 $890.13 $999.38 $975.47 $971.18 $1,106.56 $1,245.21 $1,389.57 $1,537.91 $1,690.60 $1,808.87
DiscountedFree Cash Flow 846.24 903.25 838.16 793.33 859.35 919.34 975.33 1,026.22 1,072.48 1,090.93

UOIG 19
Appendix 3 – Revenue Model
Multiple Weight
CPI Regression 33.33%
PPI Regression 33.33%
US Population Regression 33.33%
CPI Regression
Revenue Model
Total Revenue $82,189.00 $90,374.00 $96,751.00 $98,375.00 $108,465.00 $113,859.89 $119,019.96 $124,274.73 $129,624.22 $135,068.40 $140,607.30 $146,240.91 $151,969.22 $157,792.24 $163,709.96
% Growth 7.38% 9.96% 7.06% 1.68% 10.26% 4.97% 4.53% 4.42% 4.30% 4.20% 4.10% 4.01% 3.92% 3.83% 3.75%
PPI Regression
Revenue Model
Total Revenue $82,189.00 $90,374.00 $96,751.00 $98,375.00 $108,465.00 $113,840.85 $118,998.19 $124,250.17 $129,596.80 $135,038.07 $140,573.98 $146,204.54 $151,929.74 $157,749.58 $163,664.06
% Growth 7.38% 9.96% 7.06% 1.68% 10.26% 4.96% 4.53% 4.41% 4.30% 4.20% 4.10% 4.01% 3.92% 3.83% 3.75%
Weighted
Revenue Model
Total Revenue $82,189.00 $90,374.00 $96,751.00 $98,375.00 $108,465.00 $113,818.52 $119,057.50 $124,404.90 $129,861.27 $135,427.16 $141,103.15 $146,889.79 $152,787.66 $158,797.35 $164,919.44
% Growth 7.38% 9.96% 7.06% 1.68% 10.26% 4.94% 4.60% 4.49% 4.39% 4.29% 4.19% 4.10% 4.02% 3.93% 3.86%
US Population Regression
Revenue Model
Total Revenue $82,189.00 $90,374.00 $96,751.00 $98,375.00 $108,465.00 $113,754.82 $119,154.35 $124,689.78 $130,362.78 $136,175.01 $142,128.15 $148,223.92 $154,464.04 $160,850.24 $167,384.30
% Growth 7.38% 9.96% 7.06% 1.68% 10.26% 4.88% 4.75% 4.65% 4.55% 4.46% 4.37% 4.29% 4.21% 4.13% 4.06%

UOIG 20
Appendix 4 – Working Capital Model
Working Capital Model
Total Revenue $82,189.00 $90,374.00 $96,751.00 $98,375.00 $108,465.00 $113,818.52 $119,057.50 $124,404.90 $129,861.27 $135,427.16 $141,103.15 $146,889.79 $152,787.66 $158,797.35 $164,919.44
Current Assets
Accounts Receivable 845.00 949.00 1,051.00 1,116.00 1,266.00 1,335.96 1,405.27 1,476.56 1,549.85 1,625.18 1,702.56 1,782.03 1,863.61 1,947.35 2,033.25
Days Sales Outstanding A/R 3.75 3.83 3.96 4.14 4.26 4.28 4.31 4.33 4.36 4.38 4.40 4.43 4.45 4.48 4.50
% of Revenue 1.03% 1.05% 1.09% 1.13% 1.17% 1.17% 1.18% 1.19% 1.19% 1.20% 1.21% 1.21% 1.22% 1.23% 1.23%
FIFO Inventory 5,793.00 6,157.00 6,244.00 6,801.00 6,933.00 7,276.68 7,613.19 7,956.76 8,307.44 8,665.28 9,030.30 9,402.56 9,782.09 10,168.94 10,563.14
Days Inventory Outstanding 33.14 31.48 29.70 31.77 29.59 29.59 29.59 29.59 29.59 29.59 29.59 29.59 29.59 29.59 29.59
% of Revenue 7.05% 6.81% 6.45% 6.91% 6.39% 6.39% 6.39% 6.40% 6.40% 6.40% 6.40% 6.40% 6.40% 6.40% 6.41%
LIFO Reserve (827.00) (1,043.00) (1,098.00) (1,150.00) (1,245.00) (1,217.65) (1,273.96) (1,331.45) (1,390.13) (1,450.01) (1,511.09) (1,573.38) (1,636.89) (1,701.62) (1,767.59)
% of FIFO Inventory (14.28%) (16.94%) (17.58%) (16.91%) (17.96%) (16.73%) (16.73%) (16.73%) (16.73%) (16.73%) (16.73%) (16.73%) (16.73%) (16.73%) (16.73%)
% of Revenue (1.01%) (1.15%) (1.13%) (1.17%) (1.15%) (1.07%) (1.07%) (1.07%) (1.07%) (1.07%) (1.07%) (1.07%) (1.07%) (1.07%) (1.07%)
Prepaid and Other Current Assets 319.00 288.00 569.00 704.00 701.00 735.60 769.46 804.02 839.28 875.25 911.94 949.34 987.45 1,026.29 1,104.96
% of Revenue .39% .32% .59% .72% .65% .65% .65% .65% .65% .65% .65% .65% .65% .65% .67%
Total Current Assets $6,130.00 $6,351.00 $6,766.00 $7,471.00 $7,655.00 $8,130.60 $8,513.96 $8,905.89 $9,306.45 $9,715.70 $10,133.71 $10,560.54 $10,996.27 $11,440.95 $11,933.77
% of Revenue 7.46% 7.03% 6.99% 7.59% 7.06% 7.14% 7.15% 7.16% 7.17% 7.17% 7.18% 7.19% 7.20% 7.20% 7.24%
Long Term Assets
Net PP&E Beginning 13,821.00 14,147.00 14,464.00 14,848.00 16,893.00 17,912.00 19,061.92 20,268.89 21,533.14 22,855.00 24,088.39 25,238.42 26,309.40 27,304.91 28,227.87
Capital Expenditures 1,919.00 1,898.00 2,062.00 2,330.00 2,831.00 3,010.55 3,190.78 3,377.61 3,571.18 3,625.12 3,673.78 3,716.92 3,754.33 3,785.77 3,811.01
Acquisitions 7.00 51.00 122.00 2,344.00 252.00 204.87 214.30 223.93 233.75 243.77 253.99 264.40 275.02 285.84 296.85
Net PP&E Ending 14,147.00 14,464.00 14,848.00 16,893.00 17,912.00 19,061.92 20,268.89 21,533.14 22,855.00 24,088.39 25,238.42 26,309.40 27,304.91 28,227.87 29,080.67
Total Current Assets & Net PP&E $20,277.00 $20,815.00 $21,614.00 $24,364.00 $25,567.00 $27,192.52 $28,782.85 $30,439.03 $32,161.45 $33,804.09 $35,372.13 $36,869.95 $38,301.18 $39,668.83 $41,014.43
% of Revenue 24.67% 23.03% 22.34% 24.77% 23.57% 23.89% 24.18% 24.47% 24.77% 24.96% 25.07% 25.10% 25.07% 24.98% 24.87%
Current Liabilities
Accounts Payable 4,227.00 4,329.00 4,484.00 4,881.00 5,052.00 5,263.98 5,467.17 5,671.85 5,877.92 6,085.31 6,293.93 6,503.69 6,714.51 6,926.30 7,138.98
Days Payable Outstanding 24.18 22.13 21.33 22.80 21.56 21.41 21.25 21.09 20.94 20.78 20.63 20.47 20.31 20.16 20.00
% of Revenue 5.14% 4.79% 4.63% 4.96% 4.66% 4.62% 4.59% 4.56% 4.53% 4.49% 4.46% 4.43% 4.39% 4.36% 4.33%
Accrued Salaries and Wages 888.00 1,056.00 1,017.00 1,150.00 1,291.00 1,348.18 1,403.40 1,459.28 1,515.82 1,573.01 1,630.83 1,689.27 1,748.32 1,807.96 1,868.19
% of Revenue 1.08% 1.17% 1.05% 1.17% 1.19% 1.18% 1.18% 1.17% 1.17% 1.16% 1.16% 1.15% 1.14% 1.14% 1.13%
Income Taxes Payable 220.00 190.00 288.00 248.00 287.00 310.56 333.68 337.76 345.24 352.22 358.70 366.71 376.16 387.00 399.17
% of Revenue .27% .21% .30% .25% .26% .27% .28% .27% .27% .26% .25% .25% .25% .24% .24%
Other Current Liabilities 2,147.00 2,215.00 2,538.00 2,769.00 2,888.00 2,999.04 3,137.09 3,277.99 3,421.76 3,568.42 3,717.97 3,870.45 4,025.85 4,184.20 4,345.52
% of Revenue 2.61% 2.45% 2.62% 2.81% 2.66% 2.63% 2.63% 2.63% 2.63% 2.63% 2.63% 2.63% 2.63% 2.63% 2.63%
Total Current Liabilities $7,482.00 $7,790.00 $8,327.00 $9,048.00 $9,518.00 $9,921.76 $10,341.34 $10,746.88 $11,160.74 $11,578.96 $12,001.44 $12,430.12 $12,864.85 $13,305.48 $13,751.86
% of Revenue 9.10% 8.62% 8.61% 9.20% 8.78% 8.72% 8.69% 8.64% 8.59% 8.55% 8.51% 8.46% 8.42% 8.38% 8.34%

UOIG 21
Appendix 5 – Income Statement
Appendix 6 – Balance Sheet
Balance Sheet
Assets
Current Assets
Cash and Cash Equivalents 825.00$ 188.00$ 238.00$ 401.00$ 268.00$ 261.74$ 229.52$ 565.82$ 411.10$ 804.33$ 1,298.12$ 1,647.48$ 2,055.70$ 3,076.43$ 3,974.57$
Deposits in Transit 666.00 786.00 955.00 958.00 988.00 1,058.51 1,084.75 1,133.47 1,183.19 1,233.90 1,285.61 1,338.34 1,392.07 1,446.83 1,502.61
Receivables 845.00 949.00 1,051.00 1,116.00 1,266.00 1,335.96 1,405.27 1,476.56 1,549.85 1,625.18 1,702.56 1,782.03 1,863.61 1,947.35 2,033.25
Inventory 4,966.00 5,114.00 5,146.00 5,651.00 5,688.00 6,059.04 6,339.23 6,625.31 6,917.31 7,215.27 7,519.21 7,829.18 8,145.20 8,467.32 8,795.55
Prepaid and Other Current Assets 319.00 288.00 569.00 704.00 701.00 735.60 769.46 804.02 839.28 875.25 911.94 949.34 987.45 1,026.29 1,104.96
Total Current Assets 7,621.00 7,325.00 7,959.00 8,830.00 8,911.00 9,450.85 9,828.23 10,605.18 10,900.73 11,753.93 12,717.44 13,546.35 14,444.04 15,964.22 17,410.95
Long-Term Assets
Property, Planet and Equipment, net 14,147.00 14,464.00 14,848.00 16,893.00 17,912.00 19,061.92 20,268.89 21,533.14 22,855.00 24,088.39 25,238.42 26,309.40 27,304.91 28,227.87 29,080.67
Intangibles, net 130.00 702.00 757.00 757.00 757.00 757.00 757.00 757.00 757.00 757.00 757.00 757.00 757.00
Goodwill 1,140.00 1,138.00 1,234.00 2,135.00 2,304.00 2,304.00 2,304.00 2,304.00 2,304.00 2,304.00 2,304.00 2,304.00 2,304.00 2,304.00 2,304.00
Total Long-TermAssets 15,884.00 16,151.00 16,675.00 20,451.00 21,645.00 22,809.92 24,031.89 25,311.14 26,648.00 27,896.39 29,061.42 30,147.40 31,157.91 32,095.87 32,963.67
Total Assets 23,505.00$ 23,476.00$ 24,634.00$ 29,281.00$ 30,556.00$ 32,260.77$ 33,860.12$ 35,916.33$ 37,548.73$ 39,650.32$ 41,778.86$ 43,693.76$ 45,601.94$ 48,060.09$ 50,374.61$
Liabilities
Current Liabilities
Current Portion of Long-TermDebt 588.00$ 1,315.00$ 2,734.00$ 1,657.00$ 1,885.00$ 500.00$ 300.00$ 1,050.00$ 500.00$ 500.00$ 750.00$ 1,200.00$ 500.00$ 500.00$ -$
Trade Accounts Payable 4,227 4,329 4,484 4,881 5,052 5,264 5,467 5,672 5,878 6,085 6,294 6,504 6,715 6,926 7,139
Accrued Salaries and Wages 888 1,056 1,017 1,150 1,291 1,348 1,403 1,459 1,516 1,573 1,631 1,689 1,748 1,808 1,868
Deferred Income Taxes 220 190 288 248 287 311 334 338 345 352 359 367 376 387 399
Other Current Liabilities 2,147 2,215 2,538 2,769 2,888 2,999 3,137 3,278 3,422 3,568 3,718 3,870 4,026 4,184 4,346
Total Current Liabilities 8,070 9,105 11,061 10,705 11,403 10,422 10,641 11,797 11,661 12,079 12,751 13,630 13,365 13,805 13,752
Long-Term Liabilities
Long-TermDebt 7,304 6,850 6,145 9,653 9,771 9,221 8,771 8,021 7,371 7,171 6,721 5,571 5,071 5,071 5,371
Deferred Income Taxes 750 647 796 1,381 1,209 1,263 1,322 1,381 1,441 1,503 1,566 1,630 1,696 1,763 1,831
Pension and Post-Retirement Benefits 946 1,393 1,291 901 1,463 1,411 1,480 1,551 1,623 1,697 1,773 1,850 1,930 2,011 2,094
Other Long-Term Liabilities 1,137 1,515 1,127 1,246 1,268 1,268 1,268 1,268 1,268 1,268 1,268 1,268 1,268 1,268 1,268
Total Long-TermLiabilities 10137.00 10405.00 9359.00 13181.00 13711.00 13163.34 12840.43 12220.41 11703.33 11639.20 11328.05 10319.90 9964.78 10112.71 10563.72
Total Liabilities 18,207.00$ 19,510.00$ 20,420.00$ 23,886.00$ 25,114.00$ 23,585.10$ 23,481.76$ 24,017.29$ 23,364.07$ 23,718.16$ 24,079.49$ 23,950.02$ 23,329.63$ 23,918.18$ 24,315.57$
Shareowner's Equity
Common Stock $959.00 $959.00 $959.00 $959.00 $959.00 $959.00 $959.00 $959.00 $959.00 $959.00 $959.00 $959.00 $959.00 $959.00 $959.00
Additional Paid-In Capital 3,394.00 3,427.00 3,451.00 3,549.00 3,707.00 5,493.61 5,743.48 5,787.59 6,575.90 6,808.37 7,034.96 7,505.64 8,420.35 8,629.07 8,831.74
Accumulated Earnings 7,675.00 7,727.00 9,034.00 10,517.00 11,555.00 13,002.05 14,454.88 15,931.44 17,428.76 18,943.79 20,484.41 22,058.10 23,671.96 25,332.84 27,047.30
Common Stock in Treasury (6,732) (8,132) (9,237) (9,641) (10,809) (10,809) (10,809) (10,809) (10,809) (10,809) (10,809) (10,809) (10,809) (10,809) (10,809)
Total Shareowner's Equity -- The Kroger Co. 5,296.00 3,981.00 4,207.00 5,384.00 5,412.00 8,645.66 10,348.36 11,869.04 14,154.66 15,902.16 17,669.38 19,713.73 22,242.31 24,111.90 26,029.04
Noncontrolling Interests 2.00 -15.00 7.00 11.00 30.00 30.00 30.00 30.00 30.00 30.00 30.00 30.00 30.00 30.00 30.00
Total Equity 5,298.00$ 3,966.00$ 4,214.00$ 5,395.00$ 5,442.00$ 8,675.66$ 10,378.36$ 11,899.04$ 14,184.66$ 15,932.16$ 17,699.38$ 19,743.73$ 22,272.31$ 24,141.90$ 26,059.04$
Total Liabilities and Equity 23,505.00$ 23,476.00$ 24,634.00$ 29,281.00$ 30,556.00$ 32,260.77$ 33,860.12$ 35,916.33$ 37,548.73$ 39,650.32$ 41,778.86$ 43,693.76$ 45,601.94$ 48,060.09$ 50,374.61$
Income Statement
Sales 82,049.00$ 90,269.00$ 96,619.00$ 98,375.00$ 108,465.00$ 113,818.52$ 119,057.50$ 124,404.90$ 129,861.27$ 135,427.16$ 141,103.15$ 146,889.79$ 152,787.66$ 158,797.35$ 164,919.44$
Operating Expenses:
Merchandise Costs 63,803.00 71,389.00 76,726.00 78,138.00 85,512.00 89,751.03 93,901.44 98,139.08 102,464.44 106,877.99 111,380.24 115,971.69 120,652.85 125,424.24 130,286.36
Operating, General, and Adminstrative 13,823.00 15,345.00 14,849.00 15,196.00 17,161.00 18,056.77 18,938.90 19,842.81 20,768.73 21,716.89 22,687.52 23,680.85 24,697.12 25,736.56 26,799.41
Rent 623.00 619.00 628.00 613.00 707.00 696.16 680.36 660.93 637.74 610.66 579.55 544.30 504.76 460.80 412.30
Operating Profit 2,200.00 1,278.00 2,764.00 2,725.00 3,137.00 3,249.06 3,338.68 3,424.78 3,507.28 3,586.12 3,678.11 3,782.61 3,899.09 4,027.12 4,166.31
Non-Operating Expense:
Interest Expense 448.00 435.00 462.00 443.00 488.00 480.00 535.76 559.82 584.38 609.42 634.96 661.00 687.54 714.59 742.14
Earnings Before Interest and Taxes 1,752.00 843.00 2,302.00 2,282.00 2,649.00 2,769.06 2,802.93 2,864.96 2,922.91 2,976.70 3,043.14 3,121.60 3,211.55 3,312.53 3,424.17
Income TaxExpense 601.00 247.00 794.00 751.00 902.00 969.17 981.02 1,002.73 1,023.02 1,041.84 1,065.10 1,092.56 1,124.04 1,159.39 1,198.46
Net Earnings Including Non-Controlling Interest 1,151.00 596.00 1,508.00 1,531.00 1,747.00 1,799.89 1,821.90 1,862.22 1,899.89 1,934.85 1,978.04 2,029.04 2,087.51 2,153.15 2,225.71
Net Earnings (Loss) Attributable to Non-Controlling Interests 17.00 (6.00) 11.00 12.00 19.00 10.60 10.60 10.60 10.60 10.60 10.60 10.60 10.60 10.60 10.60
Net Earnings Attributable to Kroger Co. 1,134.00$ 602.00$ 1,497.00$ 1,519.00$ 1,728.00$ 1,789.29$ 1,811.30$ 1,851.62$ 1,889.29$ 1,924.25$ 1,967.44$ 2,018.44$ 2,076.91$ 2,142.55$ 2,215.11$

UOIG 22
Appendix 7 – Statement of Cash Flows
Appendix 8 – Acquisitions
Statement of Cash Flows
Cash FlowFrom Operating Activities
Net Earnings including noncontrolling interests $1,133.00 $596.00 $1,508.00 $1,531.00 $1,747.00 $1,799.89 $1,821.90 $1,862.22 $1,899.89 $1,934.85 $1,978.04 $2,029.04 $2,087.51 $2,153.15 $2,225.71
Adjustments to Reconcile:
Asset Impairment Charge 25.00 37.00 18.00 39.00 37.00 - - - - - - - - - -
LIFO Charge 57.00 216.00 55.00 52.00 147.00 - - - - - - - - - -
Stock-Based Employee Compensation 79.00 81.00 82.00 107.00 155.00 - - - - - - - - - -
Expense for Company-Sponsored Pension Plans 65.00 70.00 89.00 74.00 55.00 - - - - - - - - - -
Deferred Income Taxes 37.00 31.00 176.00 72.00 73.00 - - - - - - - - - -
Other 8.00 8.00 17.00 47.00 72.00 - - - - - - - - - -
Changes in Operating Assets and Liabilities:
Store Deposits In-Transit (12.00) (120.00) (169.00) 25.00 (27.00) (70.51) (26.24) (48.72) (49.71) (50.71) (51.71) (52.72) (53.74) (54.76) (55.78)
Inventories (88.00) (361.00) (78.00) (131.00) (147.00) (371.04) (280.19) (286.08) (292.00) (297.96) (303.94) (309.97) (316.02) (322.11) (328.24)
Receivables (11.00) (63.00) (126.00) (8.00) (141.00) (69.96) (69.31) (71.29) (73.29) (75.32) (77.38) (79.47) (81.59) (83.73) (85.91)
Prepaid and Other Current Assets 290.00 52.00 (257.00) (49.00) 2.00 (34.60) (33.86) (34.56) (35.26) (35.97) (36.68) (37.40) (38.12) (38.84) (78.67)
Trade Accounts Payable 315.00 82.00 58.00 3.00 135.00 211.98 203.19 204.67 206.07 207.39 208.62 209.76 210.82 211.79 212.67
Accrued Expenses 71.00 216.00 76.00 77.00 197.00 57.18 55.22 55.88 56.54 57.19 57.82 58.44 59.05 59.64 60.23
Income Taxes Receivable/Payable 133.00 (106.00) 164.00 (47.00) (68.00) 23.56 23.13 4.08 7.47 6.98 6.48 8.01 9.45 10.84 12.17
Net Cash Providedby Operating Activities $3,366.00 $2,658.00 $2,833.00 $3,380.00 $4,163.00 $3,612.00 $3,891.94 $4,023.50 $4,202.78 $4,381.96 $4,558.97 $4,736.04 $4,911.21 $5,084.62 $5,217.26
Cash FlowFrom Investing Activities
Payments for Property and Equipment, Including Lease Buyouts ($1,919.00) ($1,898.00) ($2,062.00) ($2,330.00) ($2,831.00) ($3,010.55) ($3,190.78) ($3,377.61) ($3,571.18) ($3,625.12) ($3,673.78) ($3,716.92) ($3,754.33) ($3,785.77) ($3,811.01)
Payments for Acquisitions (7.00) (51.00) (122.00) (2,344.00) (252.00) (204.87) (214.30) (223.93) (233.75) (243.77) (253.99) (264.40) (275.02) (285.84) (296.85)
Net Cash Usedby Investing Activities ($1,961.00) ($1,908.00) ($2,183.00) ($4,771.00) ($3,060.00) ($3,215.42) ($3,405.08) ($3,601.54) ($3,804.94) ($3,868.89) ($3,927.76) ($3,981.32) ($4,029.35) ($4,071.60) ($4,107.86)
Cash FlowFrom Financing Activities
Proceeds fromIssuance of Long-TermDebt $381.00 $453.00 $863.00 $3,548.00 $576.00 $450.00 $350.00 $600.00 $900.00 $800.00 $800.00 $800.00 $1,200.00 $1,000.00 $800.00
Payments on Long-TermDebt (553.00) (547.00) (1,445.00) (1,060.00) (375.00) (500.00) (500.00) (300.00) (1,050.00) (500.00) (500.00) (750.00) (1,200.00) (500.00) (500.00)
Treasury Stock Purchases (545.00) (1,547.00) (1,261.00) (609.00) (1,283.00) - - - - - - - - - -
Dividends Paid (250.00) (257.00) (267.00) (319.00) (338.00) (352.84) (369.08) (385.66) (402.57) (419.82) (437.42) (455.36) (473.64) (492.27) (511.25)
Other -66.00 23.00 125.00 193.00 49.00 - - - - - - - - - -
Net Cash Provided(Used) by Financing Activities ($1,004.00) ($1,387.00) ($600.00) $1,554.00 ($1,236.00) ($402.84) ($519.08) ($85.66) ($552.57) ($119.83) ($137.42) ($405.36) ($473.64) $7.73 ($211.25)
Change in Cash and Cash Equivalents $401.00 ($637.00) $50.00 $163.00 ($133.00) ($6.26) ($32.22) $336.30 ($154.72) $393.24 $493.79 $349.36 $408.22 $1,020.74 $898.14
Cash and Cash Equivalents at Beginning of Year - 825.00 188.00 238.00 401.00 268.00 261.74 229.52 565.82 411.10 804.33 1298.12 1647.48 2055.70 3076.43
Cash Equivlanets at Endof Year $188.00 $238.00 $401.00 $268.00 $261.74 $229.52 $565.82 $411.10 $804.33 $1,298.12 $1,647.48 $2,055.70 $3,076.43 $3,974.57
Acquisitions
($ in millions) 2000A 2001A 2002A 2003A 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014A
Revenue 49,000.00 50,098.00 51,760.00 53,791.00 56,434.00 60,553.00 66,110.00 70,240.00 76,000.00 76,730.00 82,190.00 90,374.00 96,750.00 98,380.00 108,470.00
Total Assets 18,179.00 19,087.00 20,349.00 20,767.00 20,493.00 20,482.00 21,215.00 22,293.00 23,211.00 23,126.00 23,505.00 23,476.00 24,652.00 29,281.00 30,556.00
% Growth 1.87% 4.99% 6.61% 2.05% -1.32% -0.05% 3.58% 5.08% 4.12% -0.37% 1.64% -0.12% 5.01% 18.78% 4.35%
Payments for Acquisitions 67 103 126 87 25 - - 90 80 36 7 51 122 2,344 252
% of Revenue 0.14% 0.21% 0.24% 0.16% 0.04% 0.00% 0.00% 0.13% 0.11% 0.05% 0.01% 0.06% 0.13% 2.38% 0.23%
Goodwill, net 3,639.00 3,594.00 3,575.00 3,134.00 2,191.00 2,192.00 2,192.00 2,144.00 2,271.00 1,158.00 1,140.00 1,138.00 1,234.00 2,135.00 2,304.00
Change in Goodwill 58.00 (19.00) (441.00) (943.00) 1.00 - (48.00) 127.00 (1,113.00) (18.00) (2.00) 96.00 901.00 169.00
% of Revenue 7.43% 7.17% 6.91% 5.83% 3.88% 3.62% 3.32% 3.05% 2.99% 1.51% 1.39% 1.26% 1.28% 2.17% 2.12%
% of Assets 20.02% 18.83% 17.57% 15.09% 10.69% 10.70% 10.33% 9.62% 9.78% 5.01% 4.85% 4.85% 5.01% 7.29% 7.54%
Goodwill amortization 101 103 - - - - - - - - - - - - -
% of Revenue 0.21% 0.21% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

UOIG 23
Appendix 9 – Discounted Cash Flow Assumptions
DiscountedFree Cash FlowAssumptions Considerations
TaxRate 35.00% Terminal Growth Rate 3.00%
Risk Free Rate 1.93% Terminal Value 76,745 Avg. Industry Debt / Equity 12.40%
Beta 0.64 PVof Terminal Value 39,770 Avg. Industry TaxRate 34.98%
Market Risk Premium 6.45% Sumof PVFree Cash Flows 12,572 Current Reinvestment Rate 41.04%
% Equity 74.00% FirmValue 52,342 Reinvestment Rate in Year 2020E 47.92%
% Debt 26.00% Total Debt 11,656 Implied Return on Capital in Perpetuity 6.26%
Cost of Debt 4.19% Cash & Cash Equivalents 1,256 Terminal Value as a % of Total 76.0%
CAPM 6.05% Market Capitalization 40,686 Implied 2015E EBITDA Multiple 9.8x
WACC 5.19% Fully Diluted Shares 502 Implied Multiple in Year 2021E 5.9x
Terminal Risk Free Rate 2.70% Implied Price 80.98 Free Cash Flow Growth Rate in Year 2024E 7.00%
Terminal CAPM 6.82% Current Price 70.55
Terminal WACC 5.76% Undervalued 14.79%
Source Implied Price Weighting
Discounted Cash Flow Analysis $80.98 75%
Comparable Analysis 90.93 25%
Weighted Implied Price $83.47
Current Price $70.55
Undervalued 18.31%

UOIG 24
Appendix 10 – Sensitivity Tables
ImpliedPrice Undervalued/(Overvalued)
Terminal Growth Rate Terminal Growth Rate
81 2.0% 2.5% 3.0% 3.5% 4.0% 0 2.0% 2.5% 3.0% 3.5% 4.0%
0.61 62.40 72.37 86.12 106.32 138.88 0.61 (11.56%) 2.57% 22.07% 50.70% 96.85%
0.63 59.99 69.32 82.06 100.52 129.64 0.63 (14.97%) (1.75%) 16.31% 42.47% 83.75%
0.65 57.71 66.45 78.27 95.19 121.37 0.65 (18.20%) (5.82%) 10.95% 34.93% 72.03%
0.67 55.54 63.74 74.74 90.29 113.93 0.67 (21.28%) (9.66%) 5.94% 27.97% 61.48%
0.69 53.48 61.18 71.43 85.76 107.19 0.69 (24.20%) (13.29%) 1.25% 21.55% 51.93%
81 2.0% 2.5% 3.0% 3.5% 4.0% 0 2.0% 2.5% 3.0% 3.5% 4.0%
4.82% 78.46 95.44 121.74 167.98 270.63 4.82% 11.21% 35.27% 72.56% 138.10% 283.60%
5.32% 66.92 78.84 95.89 122.32 168.78 5.32% (5.15%) 11.75% 35.92% 73.39% 139.24%
5.82% 58.40 67.24 79.21 96.35 122.91 5.82% (17.23%) (4.70%) 12.28% 36.57% 74.21%
6.32% 51.85 58.67 67.56 79.59 96.81 6.32% (26.51%) (16.83%) (4.24%) 12.81% 37.22%
6.82% 46.66 52.09 58.95 67.87 79.96 6.82% (33.86%) (26.16%) (16.44%) (3.79%) 13.34%
81 2.0% 2.5% 3.0% 3.5% 4.0% 0 2.0% 2.5% 3.0% 3.5% 4.0%
5.45% 72.45 85.39 103.99 133.02 184.67 5.45% 2.69% 21.03% 47.40% 88.55% 161.75%
5.95% 65.45 76.28 91.40 114.01 151.49 5.95% (7.23%) 8.12% 29.55% 61.60% 114.72%
6.45% 59.35 68.50 80.98 98.99 127.25 6.45% (15.88%) (2.90%) 14.79% 40.31% 80.37%
6.95% 53.97 61.79 72.22 86.83 108.78 6.95% (23.50%) (12.42%) 2.37% 23.08% 54.19%
7.45% 49.21 55.94 64.75 76.79 94.24 7.45% (30.25%) (20.71%) (8.22%) 8.85% 33.57%
AdjustedBeta
AdjustedBeta
TerminalWACC
TerminalWACC
MarketRisk
Premium
MarketRisk
Premium

UOIG 25
Appendix 10 – Sensitivity Tables Continued
81 2.0% 2.5% 3.0% 3.5% 4.0% 0 2.0% 2.5% 3.0% 3.5% 4.0%
25% 56.79 65.29 76.76 93.09 118.16 25% (19.51%) (7.45%) 8.81% 31.94% 67.48%
30% 58.05 66.87 78.83 95.97 122.57 30% (17.72%) (5.21%) 11.74% 36.03% 73.73%
35% 59.35 68.50 80.98 98.99 127.25 35% (15.88%) (2.90%) 14.79% 40.31% 80.37%
40% 60.68 70.19 83.22 102.16 132.24 40% (13.99%) (.51%) 17.96% 44.81% 87.44%
45% 62.06 71.94 85.55 105.50 137.55 45% (12.03%) 1.97% 21.26% 49.53% 94.97%
81 2.0% 2.5% 3.0% 3.5% 4.0% 0 2.0% 2.5% 3.0% 3.5% 4.0%
1.70% 60.87 70.22 82.97 101.36 130.22 1.70% (13.72%) (.46%) 17.60% 43.67% 84.58%
1.80% 60.20 69.47 82.10 100.32 128.92 1.80% (14.67%) (1.53%) 16.37% 42.20% 82.74%
1.90% 59.54 68.73 81.24 99.30 127.63 1.90% (15.60%) (2.59%) 15.15% 40.75% 80.91%
2.00% 58.89 67.99 80.39 98.28 126.36 2.00% (16.53%) (3.63%) 13.94% 39.31% 79.11%
2.10% 58.24 67.26 79.54 97.27 125.10 2.10% (17.45%) (4.67%) 12.75% 37.88% 77.32%
81 2.0% 2.5% 3.0% 3.5% 4.0% 0 2.0% 2.5% 3.0% 3.5% 4.0%
482 61.86 71.40 84.41 103.18 132.64 482 (12.32%) 1.21% 19.65% 46.25% 88.01%
492 60.60 69.95 82.69 101.08 129.94 492 (14.10%) (.85%) 17.21% 43.28% 84.19%
502 59.39 68.56 81.05 99.07 127.35 502 (15.81%) (2.82%) 14.88% 40.43% 80.52%
512 58.23 67.22 79.46 97.14 124.87 512 (17.46%) (4.72%) 12.64% 37.68% 76.99%
522 57.12 65.93 77.94 95.27 122.47 522 (19.04%) (6.55%) 10.48% 35.05% 73.60%
RiskFreeRate
RiskFreeRate
Outstanding
Shares
Outstanding
Shares
TaxRate
TaxRate

UOIG 26
Appendix 11 - Sources
FactSet
Federal Reserve Economic Data
Financial Visualizations Website
IBIS World
Kroger 10-K
Kroger 2013 Factbook
Kroger Quarterly Reports
Kroger Q1 2014 Earnings Presentation
Kroger Website
Morningstar
United States Census Bureau
Wall Street Journal
Yahoo Finance

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