Note Important Disclosures on Pages 8-9. Note Analyst Certification on Page 8. COMPANY UPDATE / ESTIMATE CHANGE

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1 COMPANY UPDATE / ESTIMATE CHANGE Key Metrics KR - NYSE (as of 3/8/18) $22.98 Two Year Price Target $ Week Range $ $31.45 Shares Outstanding (mil.) (basic) 875 Market Cap. ($ mil.) $20,108 3-Mo. Average Daily Volume 10,690,000 Institutional Ownership 78% Total Debt/Total Capital (1/18) 69% ROE (TTM ended 1/18) ~ 26% Book Value/Share (1/18) $7.89 Price/Book Value 2.9x Annual Dividend & Yield $ % EBITDA Margin (TTM ended 1/18) ~ 4.8% ~ adjusted to reflect a 52-week fiscal year EPS FY 1/31 (excludes nonrecurring items) Prior Curr ~ 2018E 2018E 1Q $0.71 $0.58 $0.60 $0.65 2Q $0.47 $0.39 $0.40 $0.40 3Q $0.41 $0.44 $0.45 $0.46 4Q $0.53 $0.63 $0.55 $0.54 Year $2.12 $2.04 $2.00 $2.05 P/E 10.8x 11.3x 11.2x Note: The fiscal year ends on the Saturday closest to January 31 of the following year. Note: Quarterly EPS figures may not add to annual figure due to rounding. ~ Represents a 53-week fiscal year. Revenue ($ mil) Prior Curr ~ 2018E 2018E 1Q $34,604 $36,285 $37,500 $37,275 2Q $26,565 $27,597 $28,850 $28,350 3Q $26,557 $27,749 $28,450 $28,525 4Q $27,611 $31,031 $29,450 $29,350 Year $115,337 $122,662 $124,250 $123,500 Company Description: The Kroger Co. is the nation's largest traditional grocery retailer. The company recently operated about 2,800 retail food stores and multi-department stores in 35 states and the District of Columbia under roughly two dozen names. The company also recently operated 2,258 pharmacies, 762 convenience stores, 307 fine jewelry stores, 222 retail health clinics, 1,472 supermarket fuel centers, and 38 food processing plants in the U.S. The company has roughly 453,000 employees and is headquartered in Cincinnati, OH. Note Important Disclosures on Pages 8-9. Note Analyst Certification on Page 8. Consumer Staples Analyst: Jeffrey S. Thomison, CFA / JThomison@hilliard.com Institutional Sales Desk: George Moorin / GMoorin@hilliard.com J.J.B. Hilliard, W.L. Lyons, LLC March 9, 2018 The Kroger Co. KR NYSE Long-term Buy-3 Decent 4Q Results; 2018 Guidance Reflects Competitive Environment, Company Spending Investment Highlights We were satisfied with Kroger s 4Q results, despite some retreat from 3Q achievements. Total sales of $31.0 billion for the 14-week period represented a gain of 12.4% from the 13-week period one year ago. This was $200 million above the street consensus view. Excluding the extra week and fuel operations, core sales rose 2.7%. Gross margin excluding fuel and other items declined 31 basis points, a reversal of a 30 basis point gain in 3Q. Diluted EPS of $0.63 exceeded the year ago figure of $0.53, surpassed our estimate of $0.61, and matched the street consensus figure. There were pros and cons to the quarter, in our view. We liked the identical store sales gain of 1.5%, increased market share, and continued expansion of digital/online initiatives. On the negative side, the competitive environment seemed to pick up in the period, as did Kroger s spending. Gross margin for the quarter declined and operating expenses increased. Guidance for 2018 may have disappointed some, judging by a 12% decline in the KR stock price yesterday. Adjusted EPS for the year is expected at $1.95-$2.15. This includes a significantly lower tax rate following recent tax reform. Our new 2018 estimate is $2.05, about even with the recent 53-week figure in This reflects lower sales, lower margins, but a lower tax rate than our previous model. We maintain our LT Buy rating and reiterate our two-year price target of $31 per share. We consider KR a strong competitor who can absorb some margin pressure during this dynamic period for grocery retailing. We look for EPS growth to accelerate in 2019/2020 as new business initiatives become more impactful and cost savings are achieved. We suggest an investment time horizon of two years. Our Suitability rating remains 3.

2 Exhibit 1 Consolidated Statements of Operations (figures in millions except percentages and per share data) 4Q Ended Year Ended 2/3/18 1/28/17 % chg. 2/3/18 1/28/17 % chg. Total Sales $31,031 $27, % $122,662 $115, % Merchandise Costs * 24,240 21, % 95,662 89, % LIFO Gross Profit 6,791 6, % 27,000 25, % Oper., Gen., & Admin. Exp. 5,962 4, % 21,568 19, % Rent % % Deprec. & Amort (1.2%) 2,436 2, % Operating Expenses 6,747 5, % 24,915 22, % Operating Profit (94.9%) 2,085 3,436 (39.3%) Interest Expense % % Earnings Before Taxes (104) 732 NMF 1,484 2,914 (49.1%) Taxes (957) 230 NMF (405) 957 NMF Net Earnings % 1,889 1,957 (3.5%) Net Earnings Attributable to Noncontrolling Interests (1) (4) (18) (18) Net Earnings Attrib. to Kroger, GAAP $854 $ % $1,907 $1,975 (3.4%) Diluted EPS, GAAP $0.96 $ % $2.09 $ % Adjusted Net Earnings, Excluding Nonrecurring Items $562 $ % $1,858 $2,046 (9.2%) Adjusted EPS, Excluding Nonrecurring Items $0.63 $ % $2.04 $2.12 (3.8%) Adjusted EPS, Excluding Nonrecur. Items and Extra Week $0.54 $ % $1.95 $2.12 (8.0%) Avg. Diluted Shares Outst (6.3%) (5.6%) As a % of Total Sales: bp. chg. bp. chg. Gross Profit (LIFO basis) 21.88% 22.19% (31) 22.01% 22.40% (39) Gross Profit (FIFO basis) ** 21.71% 22.19% (48) 22.01% 22.42% (41) Oper., Gen., & Admin. Exp % 16.24% % 16.63% 96 Rent 0.71% 0.78% (7) 0.74% 0.76% (2) Deprec. & Amort. 1.82% 2.07% (25) 1.99% 2.03% (4) Operating Expenses 21.74% 19.09% % 19.42% 89 Operating Profit 0.14% 3.11% (297) 1.70% 2.98% (128) Net Earnings Attrib. to Kroger 2.75% 1.83% % 1.71% (16) Tax Rate NMF 31.42% NMF NMF 32.84% NMF * Merchandise Costs include advertising, warehousing and transportation expenses as well as LIFO (last-in, first-out) charges and credits. ** FIFO (first-in, first-out) gross margin excludes LIFO charges (occur more often in times of rising product cost inflation) and credits. ** FIFO gross margin is a common analytical measure for management and the investment community. Source: Company reports Note: Fiscal year ends on Saturday closest to January 31 Comments on fiscal 4Q. We were relatively pleased with Kroger s fiscal 4Q performance, while being mindful of certain changes from 3Q results. Gross margin reversed direction, with a 31 basis point contraction after a 30 basis point gain in 3Q. We believe the competitive market intensified a bit in 4Q, with Kroger making some pricing and store-level investments in the period that led to margin pressure but also helped generate increases in total households served, store traffic, and market share. We support the company s focus on the customer experience while remaining mindful that shoppers have more options available to them than ever regarding when, where, and how they shop. Grocery shopping can be a pure brick and mortar visit, an online experience, or a combination of the two. Kroger remains focused on redefining the grocery customer experience, and this takes vision and investment spending. Hilliard Lyons Equity Research 2 Consumer Staples

3 Among the quarter s highlights: Total reported sales in 4Q rose 12.4%, reflecting a 14-week quarter compared to a 13-week quarter a year ago. This relates to differing days for Kroger s fiscal year end (2/3/18 versus 1/28/17). Identical food store sales rose 1.5%, continuing a trend of sequential improvement from an increase of 1.1% in 3Q 2017, an increase of 0.7% in 2Q 2017, and declines of 0.2% in 1Q 2017 and 0.7% in 4Q Kroger s identical food store sales have increased in 55 of the past 57 quarters. As a gauge for core business, we note sales excluding fuel centers and the extra week increased 2.7%. Overall tonnage was positive for the quarter, while the number of total households served and overall market share were also up. In fact, the company s overall market share rose for the 13 th consecutive year. Produce, deli, meat and seafood were among the strongest grocery categories. The private label, natural, and organic segments continued to perform well. Kroger s wholly owned brands (typically attractive margin products) represented just under 30% of total units sold in 4Q and 26% of the period s sales dollars, excluding fuel and pharmacy. This includes the popular Simple Truth brand, which surpassed $2 billion in sales in 2017 after launching just five years ago. Digital initiatives continued to grow. This includes Kroger s ClickList and Harris Teeter s Express Lane (online ordering systems featuring curb-side pick-up by customers). The company is approaching 1,100 locations with this service. Home delivery is available at nearly 900 locations. For all of 2017, the company s total digital revenues grew by more than 90%. Fuel margins rose in 4Q due to a higher average retail price per gallon. Operating expenses, excluding fuel, mergers, and pension contributions, increased by 22 basis points as a percent of total sales, slightly more than the increase in 3Q. Diluted earnings per share excluding nonrecurring items were $0.63, up from the year ago figure of $0.53. This matched the street consensus figure and surpassed our estimate by $0.02. Excluding the extra week, diluted EPS were $0.54 for the recent 4Q. Share repurchases in recent quarters ($1.6 billion over the past twelve months) led to a 6.3% drop in the 4Q weighted average share count, which helped EPS. The company implemented a $1 billion repurchase plan in June Financial. Total debt at 4Q end was $15.6 billion. This represents senior notes, debentures, capital leases and other financing obligations. This was about $1.5 billion more than the year ago period due to the recent recognition and funding of various pension liabilities. Total debt as a percentage of total capital (debt plus shareholders equity) was 69%. Total cash and equivalents were $339 million while shareholders equity was $6.9 billion. Kroger has historically maintained a leveraged balance sheet that is comfortably supported by cash flow, in our view. At the end of 4Q, net debt-to-trailing adjusted EBITDA (earnings before interest, taxes, depreciation & amortization) was 2.65x compared to 2.3x a year ago. The increase reflects the aforementioned debt associated with funding pension obligations. The company expects to use a portion of proceeds from a planned asset sale (namely the convenience store segment) as well as future cash flow to reduce debt and achieve its target leverage ratio of 2.3x-2.5x. Cash flow remains at a considerable level, in our view, allowing for several practical uses. Over the past twelve months, the company has contributed an incremental $1.2 billion to company sponsored pension plans, and spent $1.6 billion on stock buybacks, $444 million in dividends, and $3.0 billion on capital projects. Hilliard Lyons Equity Research 3 Consumer Staples

4 Competitive environment. The industry has always been highly competitive, but we sensed a heightened level during the second half of 2017 as some new entrants moved into various markets, several traditional operators announced expansion plans, and some chains got more aggressive on price. We have been impressed by Kroger s history of strong market share positions for its various store banners. We believe a combination of physical store and online retailing has become the norm for the grocery industry. Importantly, we feel Kroger is dominant with the former and is moving aggressively and effectively with the latter. The company s geographic reach, quality of its store base, digital initiatives, and long history as an industry leader could help as it re-defines itself in this dynamic environment. Recent strategic moves such as increasing labor hours in stores and increasing wages have added to operating expenses, but we feel this can improve the quality of the work force and enhance the shopping experience. Convenience store segment update. At its investor conference in October 2017, management announced its intent to divest its convenience store segment (represented at that time by 783 stores under numerous banners such as Turkey Hill, Tom Thumb, KwikShop and others). This does not include Kroger s fuel centers that are typically adjacent to existing grocery stores. Annual revenues for the convenience store segment is about $4.0 billion. According to management, valuations were relatively high in the convenience store industry at the time, and it wanted to explore all options while being mindful of the company s overall strategic vision. In February 2018, Kroger and EG Group, a privately-held convenience store retailer based in the United Kingdom, announced a definitive agreement for the sale of Kroger's convenience store business to EG Group for $2.15 billion. The transaction is expected to close during Kroger's 1Q of this year. Management has stated it would initially use the proceeds to reduce debt (thus lowering the company s leverage ratio) and repurchase stock. However, we also believe the transaction makes future acquisitions by Kroger a more realistic possibility, as it potentially transforms its portfolio of businesses to improve margins, growth potential, and online/e-commerce capabilities. Earnings outlook. In 2017, management ceased providing long-term financial guidance. In the recent past, goals included an investment grade debt rating (most debt currently rated BBB by S&P), improving return on invested capital, annual EPS growth of 8%-11% over rolling three to five year time horizons, and annual dividend growth. We do not believe these goals have been terminated, but will likely be kept internal going forward. However, the former EPS growth goal would be difficult to achieve in the near term given the competitive environment, in our view. Management issued guidance for the current year that may have disappointed investors, judging by the 12% decline in the KR share price yesterday. We note a reversion to a 52-week year in 2018 from the 53-week year in Management expects 2018 identical supermarket sales excluding fuel to grow 1.5%- 2.0%, gross margin to decline somewhat, and diluted EPS to be in the $1.95-$2.15 range. We note management is comfortable with this EPS range regardless of the timing of the convenience store divestiture, as lost earnings are offset by the positive impact of lower interest expense following debt reduction and share repurchases. The company expects capital investments, excluding potential acquisitions, of roughly $3 billion and a tax rate of approximately 22% after the impact of recent tax reform. We have updated our fiscal 2018 financial model, which includes net sales growth of 0.7% to $123.5 billion, a decrease of $750 million from our previous estimate. This reflects a more conservative outlook regarding the competitive environment. We also assume an approximate 30 basis point decline in gross margin. We expect share repurchases to continue. Our EPS estimate is raised by $0.05 to $2.05, with the expected lower tax rate being the main factor in our increase. Hilliard Lyons Equity Research 4 Consumer Staples

5 Valuation. KR shares are trading at roughly 11x our 2018 earnings estimate. One year ago, when the industry environment was more favorable, KR was trading at 13x estimated forward earnings. Over the past five years, the shares have traded in a range of roughly 10x to 22x projected forward earnings with a median forward multiple of 15.0x. On a longer term basis, the stock s median forward multiple over the past twenty years is 13.7x. KR s forward P/E multiple is currently 0.6x the S&P 500 s forward multiple, below premium levels from late 2014 through early 2016, and below the median figure of 0.8x over the past five years. On an Enterprise Value/EBITDA basis, KR shares are trading at 5.9x based on our projection of twelve-month forward EBITDA. We believe a five year historical range for this measure is 5-9 times. Opinion. Being mindful of the industry conditions at hand such as competition and adapting to changes in consumer preferences (what, how, and when they eat) we believe Kroger is performing relatively well and have no problems with the company s strategies or execution. We consider the company to be digging in its heels in a competitive sense, while devoting considerable resources to meet customers wants and needs in a dynamic period for the grocery industry. We have favorable views on the company s pursuit of growth opportunities through the digital/online area, home delivery options, store renovations, and acquisitions. We expect shareholder friendly uses of discretionary cash flow such as dividends, share buybacks, and potentially acquisitions to continue in the years ahead. We expect compounded annual EPS growth to be moderate in the next few years due to the impact of greater competition and higher costs of meeting customers shopping needs. This includes remaining competitive on price and expanding the online shopping service. We expect EPS growth to accelerate in 2019 and more so in Free cash flow (after capital expenditures) over the next few years could be substantial, in our view. This could allow for significant amounts for uses such as dividends, share repurchases, debt reduction, or acquisitions. We recommend purchase of KR and reiterate our preference for a two-year investment time frame. We believe allows the company time to navigate the challenges at hand, and maintain strengths such as industry leadership, integration of technology, and a focus on shareholder value. Considering all factors, including the trend of stiffer competition, we believe KR shares deserve to trade below recent median valuation levels but we feel the current level is undeservedly low. Our two-year target remains $31 per share, which is based on a lower future valuation assumption than what we had been using. This reduction is based on current views on the competitive environment and investments in operations to retain an industry leadership position. Our target is based on our 2020 EPS estimate of $2.45 (forward earnings two years from now) and a price/earnings multiple of 12.6x. This is below our previous multiple assumption of 13.6x, but above the 11.2x multiple on our current estimate of forward earnings. Additionally, we note our assumed forward multiple is below the five-year median figure of 15.0x and similar to the twenty year median of 13.7x. Additionally, our target represents an Enterprise Value/EBITDA multiple of 6.1x based on our projection of forward EBITDA two years from now, slightly above the current valuation but below the median of 7.0x over the past five years. Hilliard Lyons Equity Research 5 Consumer Staples

6 In formulating our outlook and price target, we have tried to reflect the current competitive landscape, a higher operating cost structure to defend market share positions, and some additional risks associated with new business ventures (mostly online initiatives). Offsetting positives include growing market share, expected top line and bottom line growth, and potential fine-tuning of the company s portfolio of businesses. Suitability. Our Suitability rating on KR is 3. This reflects the competitive environment (current and projected, especially in light of the Amazon/Whole Foods combination in 2017) and uncertainty regarding the potential duration of such an environment. We also consider Kroger s degree of unionized labor and its debt level in determining our suitability rating. Favorable factors include the company s large sales base, diversity among geographic regions and store concepts/banners, strong market share positions, favorable historical operating results, and large market capitalization. Risks and Considerations. The competitive environment is a key risk factor, in our view. The industry has always been quite competitive, but recent developments include new entrants to the industry and new ways of connecting with customers. This includes online sales, with either in-store pick-up or home delivery. We believe Amazon s recent purchase of Whole Foods Market is a testament to the heightened competitive landscape yet also the attractiveness of the industry. We believe another risk factor with Kroger is its labor profile. A majority of the company s approximate 453,000 employees are covered by collective bargaining agreements negotiated with local unions affiliated with one of several international unions. There are approximately 300 such agreements currently in place, typically with terms of three to five years. Thus, the company has numerous labor agreements that come up for negotiation each year. Common key issues are health care and pension costs. Potential work stoppages could have an adverse effect on operating results. Other factors that could affect operations include the success of future growth plans, capital spending decisions, completion and integration of acquired businesses, strategic investments, food prices (including periods of sustained deflation and inflation), overall commodity prices, promotional industry environments, industry consolidation, fuel prices, consumer spending, unemployment levels, adverse weather conditions, and the state of financial markets (access to capital). Hilliard Lyons Equity Research 6 Consumer Staples

7 Exhibit 2 Consolidated Statements of Operations (figures in millions except percentages and per share data) FY18E % chg. FY17 ~ % chg. FY16 % chg. FY15 % chg. Total Sales $123, % $122, % $115, % $109, % Merchandise Costs * 96, % 95, % 89, % 85,496 (0.0%) LIFO Gross Profit 26,825 (0.6%) 27, % 25, % 24, % Oper., Gen., & Admin. Exp. 20,525 (4.8%) 21, % 19, % 17, % Rent % % % % Deprec. & Amort. 2, % 2, % 2, % 2, % Operating Expenses 23,980 (3.8%) 24, % 22, % 20, % Operating Profit 2, % 2,085 (39.3%) 3,436 (3.9%) 3, % Interest Expense 590 (1.8%) % % 482 (1.2%) Earnings Before Taxes 2, % 1,484 (49.1%) 2,914 (5.8%) 3, % Taxes 496 (222.5%) (405) (142.3%) 957 (8.4%) 1, % Net Earnings 1,759 (6.9%) 1,889 (3.5%) 1,957 (4.5%) 2, % Net Earnings Attributable to Noncontrolling Interests (22) (18) (18) 10 Net Earnings Attrib. to KR $1,781 (6.6%) $1,907 (3.4%) $1,975 (3.1%) $2, % Adjusted EPS, Excluding Nonrecurring Items $ % $2.04 (3.8%) $ % $ % Avg. Diluted Shares Outst. 870 (3.8%) 904 (5.6%) 958 (2.2%) 980 (1.3%) As a % of Total Sales: bp. chg. bp. chg. bp. chg. bp. chg. Merchandise Costs 78.28% % % (24) 77.84% (99) Gross Profit (LIFO basis) 21.72% (29) 22.01% (39) 22.40% % 99 Gross Profit (FIFO basis) ** 21.76% (24) 22.01% (41) 22.42% % 88 Oper., Gen., & Admin. Exp % (96) 17.58% % % 52 Rent 0.76% % (2) 0.76% % 1 Deprec. & Amort. 2.04% % (4) 2.03% % 11 Operating Expenses 19.42% (89) 20.31% % % 63 Operating Profit 2.30% % (128) 2.98% (28) 3.26% 36 Net Earnings Attrib. to KR 1.44% (11) 1.55% (16) 1.71% (14) 1.86% 26 Tax Rate 22.00% NMF NMF NMF 32.84% (93) 33.78% (28) ~ 53-week fiscal year * Merchandise Costs include advertising, warehousing and transportation expenses as well as LIFO (last in, first out) charges. ** FIFO (first-in, first-out) gross margin excludes LIFO charges (occur more often in times of rising product cost inflation) and credits. ** FIFO gross margin is a common analytical measure for management and the investment community. Source: Company reports and Hilliard Lyons estimates Note: Fiscal year ends on Saturday closest to January 31 of the following year Additional information is available upon request. Prices of other stocks mentioned: Amazon.com Inc. - AMZN - $ Hilliard Lyons Equity Research 7 Consumer Staples

8 Analyst Certification I, Jeffrey S. Thomison, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company(ies) and its (their) securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation in exchange for expressing the specific recommendation(s) in this report. Important Disclosures Hilliard Lyons' analysts receive bonus compensation based on Hilliard Lyons profitability. They do not receive direct payments from investment banking activity. Investment Ratings Buy - We believe the stock has significant total return potential in the coming 12 months. Long-term Buy - We believe the stock is an above average holding in its sector, and expect solid returns to be realized over a longer time frame than our Buy rated issues, typically 2-3 years. Neutral - We believe the stock is an average holding in its sector, is currently fully valued, and may be used as a source of funds if better opportunities arise. Underperform - We believe the stock is vulnerable to a price set back in the next 12 months. Suitability Ratings 1 - A large cap, core holding with a solid history 2 - A historically secure company which could be cyclical, has a shorter history than a "1" or is subject to event driven setbacks 3 - An above average risk/reward ratio could be due to small size, lack of product diversity, sporadic earnings or high leverage 4 - Speculative, due to small size, inconsistent profitability, erratic revenue, volatility, low trading volume or a narrow customer or product base Hilliard Lyons Investment Banking Recommended Issues Provided in Past 12 Mo. # of % of Rating Stocks Covered Stocks Covered Banking No Banking Buy 37 33% 11% 89% Hold/Neutral 69 62% 9% 91% Sell 5 5% 0% 100% As of 8 March 2018 Hilliard Lyons Equity Research 8 Consumer Staples

9 Note: Price targets accompanying Buy ratings reflect a one year time period while price targets accompanying Long-term Buy ratings reflect a two to three year time period. Other Disclosures Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of J.J.B. Hilliard, W.L. Lyons, LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed here. J.J.B. Hilliard, W.L. Lyons, LLC is a multi-disciplined financial services firm that regularly seeks investment banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as placement agent in private transactions. The information herein has been obtained from sources we believe to be reliable but is not guaranteed and does not purport to be a complete statement of all material factors. This is for informational purposes and is not a solicitation of orders to purchase or sell securities. Reproduction is forbidden unless authorized. All rights reserved. Hilliard Lyons Equity Research 9 Consumer Staples