Fitch Rates Kroger's $800MM 10-Yr and 30-Yr Notes 'BBB'; Outlook Stable

Fitch Ratings has assigned a rating of 'BBB' to The Kroger Co.'s (Kroger) $800 million issue of 10- and 30-year notes, the proceeds of which will be used to repay long-term indebtedness and for general corporate purposes. The Rating Outlook is Stable. A full list of ratings is shown below.

The rating reflects Kroger's industry-leading sales growth and market share gains, strong cash flow, and steady credit metrics. The rating also considers the company's ongoing share repurchase activity, and intense price competition in the sector that will continue to pressure gross margins.

Kroger generates industry leading non-fuel identical store (ID) sales as a result of strong pricing perceptions by customers, effective marketing through use of loyalty card data, and improvements to the shopping experience. ID sales growth of 4.9% in 2011, follows an increase of 2.8% in 2010, leading to market share gains in most of its major markets. The company has achieved these results despite intense competition in the industry, and consumers trading down to lower priced products.

Kroger's EBIT margin declined to 2.6% in 2011 (excluding charges related to the consolidation of four multi-employer pension plans), from 2.8% in 2010, due to an increase in lower margin fuel sales and the LIFO charge. The EBIT margin on a FIFO basis excluding fuel is expected to remain steady, with the potential for a gradual recovery longer term, as cost control efforts offset pressure on gross margins.

Kroger's financial leverage (lease-adjusted debt/EBITDAR) was steady at 3.0 times (x) at end-2011, consistent with the prior three years. Free cash flow (FCF) after dividends is expected to track around $600 million-$800 million over the next three years, helped by moderate growth in EBITDA and steady capital expenditures. Management is expected to direct essentially all of this cash flow and potentially some incremental borrowing to share repurchases and dividends, in order to manage lease-adjusted debt/EBITDAR at or close to 3.0x (which roughly equates to the company's net debt/EBITDA target of 2.0x).

Kroger benefits from the geographic breadth and diverse formats of its store base with 2,435 supermarket and multi-department stores across 31 states, as well as 791 convenience and 348 jewelry stores. As of Jan. 28, 2012, 1,090 of its large stores and most of its convenience stores had fuel centers.

Fitch currently rates Kroger as follows:

--Long-term IDR 'BBB';

--Senior unsecured notes 'BBB';

--Bank credit facility 'BBB';

--Short-term IDR 'F2';

--Commercial paper 'F2'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 12, 2011;

--'Evaluating Corporate Governance'(Dec. 13, 2011);

--'Short-Term Ratings Criteria for Non-Financial Corporates', Aug. 12, 2011.

--'Analysis of U.S. Corporate Pensions', Aug. 5, 2011.

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657143

Short-Term Rating Criteria for Non-Financial Corporates

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=663651

Analysis of U.S. Corporate Pensions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578365

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