2.MERGERS

On August 18, 2014, the Company closed its merger with Vitacost.com, Inc. (“Vitacost.com”) by purchasing 100% of the Vitacost.com outstanding common stock for $8.00 per share or $287. Vitacost.com is a leading online retailer of health and wellness products, which are sold directly to consumers through the website vitacost.com. This merger affords the Company access to Vitacost.com’s extensive e-commerce platform, which can be combined with the Company’s customer insights and loyal customer base, to create new levels of personalization and convenience for customers. The merger was accounted for under the purchase method of accounting and was financed through the issuance of commercial paper (see Note 6). In a business combination, the purchase price is allocated to assets acquired and liabilities assumed based on their fair values, with any excess of purchase price over fair value recognized as goodwill. In addition to recognizing the assets and liabilities on the acquired company’s balance sheet, the Company reviews supply contracts, leases, financial instruments, employment agreements and other significant agreements to identify potential assets or liabilities that require recognition in connection with the application of acquisition accounting under Accounting Standards Codification (“ASC”) 805. Intangible assets are recognized apart from goodwill when the asset arises from contractual or other legal rights, or are separable from the acquired entity such that they may be sold, transferred, licensed, rented or exchanged either on a standalone basis or in combination with a related contract, asset or liability.

Pending finalization of the Company’s valuation and other items, the following table summarizes the preliminary fair values of the assets acquired and liabilities assumed as part of the merger with Vitacost.com:

	August 18,
	2014
ASSETS
Total current assets	$	79

Property, plant and equipment	28
Intangibles	81

Total Assets, excluding Goodwill	188

LIABILITIES
Total current liabilities	(54		)

Deferred income taxes	(7		)

Total Liabilities	(61		)

Total Identifiable Net Assets	127
Goodwill	160
Total Purchase Price	$	287

Of the $81 allocated to intangible assets, the Company recorded $49, $26 and $6 related to customer relationships, technology and the trade name, respectively. The Company will amortize the technology and the trade name, using the straight line method, over 10 and three years, respectively, while the customer relationships will be amortized over five years using the declining balance method. The goodwill recorded as part of the merger was attributable to the assembled workforce of Vitacost.com and operational synergies expected from the merger, as well as any intangible assets that did not qualify for separate recognition. The transaction was treated as a stock purchase for income tax purposes. The assets acquired and liabilities assumed as part of the merger did not result in a step up of the tax basis and goodwill is not expected to be deductible for tax purposes. The above amounts represent the preliminary allocation of the purchase price, and are subject to revision when the resulting valuations of property and intangible assets are finalized, which will occur prior to August 18, 2015. The results of operations of Vitacost.com were not material in 2014.

On January 28, 2014, the Company closed its merger with Harris Teeter by purchasing 100% of the Harris Teeter outstanding common stock for $2,436. The merger allows us to expand into the fast-growing southeastern and mid-Atlantic markets and into Washington, D.C. The merger was accounted for under the purchase method of accounting and was financed through a combination of commercial paper and long-term debt (see Note 6).

The fair value step up adjustment to Harris Teeter inventory as of the merger date is recorded in the LIFO reserve. This resulted in a $52 decrease in LIFO reserve.

The Company’s purchase price allocation was finalized in the fourth quarter of 2014. The changes in the fair values assumed from the preliminary amounts determined as of February 1, 2014 were an increase in goodwill of $9, an increase in accrued salaries and wages of $13, a decrease in current deferred income tax liabilities of $4, an increase in other current liabilities of $5 and a decrease in long-term deferred income tax liabilities of $5. The table below summarizes the final fair values of the assets acquired and liabilities assumed:

	January 28,
	2014
ASSETS
Cash and temporary cash investments	$	92
Store deposits in-transit	28
Receivables	41
FIFO inventory	426
Prepaid and other current assets	31
Total current assets	618

Property, plant and equipment	1,328
Intangibles	558
Other assets	238

Total Assets, excluding Goodwill	2,742

LIABILITIES
Current portion of long-term debt including obligations under capital leases and financing obligations	(7		)
Trade accounts payable	(202		)
Accrued salaries and wages	(60		)
Deferred income taxes	(16		)
Other current liabilities	(164		)
Total current liabilities	(449		)

Fair-value of long-term debt including obligations under capital leases and financing obligations	(252		)
Deferred income taxes	(280		)
Pension and postretirement benefit obligations	(98		)
Other long-term liabilities	(137		)

Total Liabilities	(1,216		)

Total Identifiable Net Assets	1,526
Goodwill	910
Total Purchase Price	$	2,436

Of the $558 allocated to intangible assets, $430 relates to the Harris Teeter trade name, to which we assigned an indefinite life and, therefore, will not be amortized. The Company also recorded $53 and $75 related to pharmacy prescription files and favorable leasehold interests, respectively. The Company will amortize the pharmacy prescription files and favorable leasehold interests over seven and 24 years, respectively. The goodwill recorded as part of the merger was attributable to the assembled workforce of Harris Teeter and operational synergies expected from the merger, as well as any intangible assets that do not qualify for separate recognition. The transaction was treated as a stock purchase for income tax purposes. The assets acquired and liabilities assumed as part of the merger did not result in a step up of the tax basis and goodwill is not expected to be deductible for tax purposes.

Pro forma results of operations, assuming the Harris Teeter transaction had taken place at the beginning of 2012 and the Vitacost.com transaction had taken place at the beginning of 2013, are included in the following table. The pro forma information includes historical results of operations of Harris Teeter and Vitacost.com and adjustments for interest expense that would have been incurred due to financing the mergers, depreciation and amortization of the assets acquired and excludes the pre-merger transaction related expenses incurred by Harris Teeter, Vitacost.com and the Company. The pro forma information does not include efficiencies, cost reductions, synergies or investments in lower prices for our customers expected to result from the mergers. The unaudited pro forma financial information is not necessarily indicative of the results that actually would have occurred had the Harris Teeter merger been completed at the beginning of 2012 or the Vitacost.com merger completed at the beginning of 2013.

	Fiscal year ended January 31, 2015		Fiscal year ended February 1, 2014
Sales	$	108,687	$	103,584
Net earnings including noncontrolling interests	1,736		1,624
Net earnings attributable to noncontrolling interests	19		12

Net earnings attributable to The Kroger Co.	$	1,717	$	1,612