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    KR
    Earnings call· Jul 2025(Q2 FY26)

    KROGER CO KR

    Sep 11, 2025 Source

    Executive summary

    Kroger Q2 FY26 — Strong Sales Momentum and Strategic Cost Optimization

    Kroger delivered strong Q2 FY26 results, driven by robust identical sales growth, particularly in e-commerce and pharmacy, and significant progress in cost optimization. The company is sharpening its value proposition through strategic price investments and simplified promotions, while also leveraging its store network for faster e-commerce fulfillment. A strategic review of e-commerce operations is underway to enhance profitability, and the company is actively pursuing sourcing and productivity improvements to fuel future investments and manage a competitive landscape.

    Highlights

    5

    • Identical sales without fuel grew 3.4% in Q2 FY26, marking the sixth consecutive quarter of improvement and exceeding expectations.

    • Adjusted EPS increased 12% to $1.04 in Q2 FY26, representing the strongest growth rate since Q4 FY23.

    • E-commerce sales grew 16% in Q2 FY26, driven by increased households and order frequency, with delivery sales surpassing store pickup for the first time.

    • FIFO gross margin rate, excluding certain items, increased 39 basis points in Q2 FY26, reflecting lower supply chain costs and shrink.

    • The quarterly dividend was raised by 9%, marking the 19th consecutive year of dividend increases.

    Concerns

    4

    • Fuel sales and profitability were lower in Q2 FY26 compared to the prior year, attributed to decreased average retail price per gallon and fewer gallons sold.

    • The FIFO gross margin rate, when adjusted for the sale of Kroger Specialty Pharmacy, decreased 9 basis points in Q2 FY26, primarily due to pharmacy mix and price investments.

    • Management expects gallons sold to remain lower year-over-year for the remainder of 2025, creating a headwind for profit.

    • The consumer environment remains uncertain, with low and middle-income households actively seeking deals and higher-income households cutting back on discretionary spending.

    Guidance & targets

    9
    CategoryTargetConfidence
    New store openings
    30% increase
    medium materiality
    High
    Underlying gross margin rate
    relatively flat
    medium materiality
    Medium
    Gallons sold
    remain lower
    medium materiality
    High
    Identical sales without fuel
    2.7% to 3.4%
    high materiality
    High
    Identical sales without fuel
    slightly below the midpoint of our full year range
    medium materiality
    Medium
    Adjusted FIFO net operating profit
    $4.8 billion to $4.9 billion
    high materiality
    High
    Adjusted EPS
    $4.70 to $4.80
    high materiality
    High
    Total shareholder return
    8% to 11%
    medium materiality
    Medium
    Food inflation
    1.5% to 2.5%
    medium materiality
    Medium

    Operational metrics

    14
    Corporate administrative team reduction
    nearly 1,000
    Q2 FY26

    Necessary for long-term success and part of cost optimization efforts.

    Our Brands sales growth
    outpacing national brands
    Q2 FY26

    Our Brands offer unique products with high quality and represent a point of differentiation for Kroger.

    Adjusted EPS
    $1.0412% growth YoY
    Q2 FY26

    Reflecting continued momentum in the business.

    ESI impact on ID sales
    15positive impact
    Q2 FY26

    From the return of ESI customers to stores; full return expected to take time.

    Net total debt to adjusted EBITDA ratio
    1.63below target range of 2.3 to 2.5
    Q2 FY26 end

    Provides significant financial flexibility; expect to return to target leverage ratio over time.

    Target leverage ratio
    2.3 to 2.5
    long-term

    Target range for net total debt to adjusted EBITDA.

    Quarterly dividend increase
    9
    Q2 FY26

    Reflecting strength of free cash flow and commitment to returning capital to shareholders.

    Dividend compounded annual growth rate
    13
    since 2006

    Since reinstatement in 2006.

    ASR program
    $5 billionexpected completion
    Q3 FY25

    Being completed under Kroger's $7.5 billion share repurchase authorization.

    Open market share repurchases
    $2.5 billionexpected completion by end of fiscal year
    FY26

    Remaining authorization after ASR program completion; contemplated in full year guidance.

    Delivery fulfillment speed
    under 2 hours
    Q2 FY26

    Leveraging store network and partnership with Instacart.

    Grocery units
    almost flatYoY
    Q2 FY26

    Driven by strategic price investments and improved execution.

    LIFO charge (extrapolated)
    $0.10
    FY26

    Reflects a catch-up from Q1 and ongoing inflation assumptions.

    EBIT impact on FCF
    $100 million
    Q2 FY26

    Mentioned in the context of why free cash flow guidance was not raised despite improved EBIT.

    Industry KPIs

    9
    MetricValueDetails
    Sg a ratedecreased 5 bpsbps
    Gross margin driversincreased 39 bpsbps
    Fuel gas station economicslower
    Warehouse store club count30projects
    Comparable same store sales3.4%
    E commerce digital sales growth16%
    Advertising retail media revenuestrong
    Private label own brand penetrationoutpacing national brands
    Category level comps and inflation deflation1.5% to 2.5%%

    Deals & partnerships

    1
    C&S Wholesale GrocersLegal settlement

    Reached a legal settlement to resolve claims, allowing the company to remain focused on serving customers.

    Risks & headwinds

    4
    Fuel headwindsremainder of 2025

    gallons sold to remain lower year-over-year for remainder of 2025

    Mitigation: Working hard to offset with cost and efficiency initiatives.

    Uncertain consumer environmentongoing

    consumer sentiment continues to be low historically

    Mitigation: Focusing on value, simpler promotions, and appealing to broader customer segments; watching carefully.

    Pharmacy mix pressure on gross marginongoing

    pharmacy sales growth impacts margin rate

    Mitigation: Leveraging multiple levers to improve gross margin rate over time, balancing with price investments.

    Tariff environmentnot expected to going forward

    not had a material impact on our business thus far

    Mitigation: Proactive to address exposure; approach remains to raise prices as a last resort.

    What to watch in Q3 FY26

    4

    E-commerce strategic review outcome

    Q3 FY26
    CurrentProgressing with two key objectives: improve customer experience using stores for fulfillment and improve profitability/reduce cost to serve.
    TargetUpdate on strategic review and clear path toward profitability.

    Why it matters

    The review will determine the future operating model and profitability trajectory of the e-commerce business, including the role of automated fulfillment centers.

    We expect to share an update on our strategic review during the third quarter. We're confident that the outcome of our work will lead to both stronger e-com capabilities and a clear path toward profitability.

    Q&A highlights

    6

    How will Kroger implement increased store-based e-commerce fulfillment, considering timing, cost, capacity, and labor? Also, what is the competitive environment for pricing, and will price investments remain margin-neutral?

    Kroger already heavily uses stores for e-commerce fulfillment, viewing it as an asset-light delivery possibility for faster service. The strategic review will provide more details in Q3. The competitive pricing environment is rational, and Kroger aims to simplify pricing, lower prices on everyday items, and narrow price spreads while maintaining margin neutrality through cost-saving initiatives.

    “We are taking a hard look at some of our automated facilities. But we had a very strong quarter in both e-commerce sales as well as profitability. And significantly, this quarter was the first time that the delivery sales passed store pickup sales.”

    asked by Leah Jordan · answered by Ronald Sargent

    2 min read7 chapters

    Detailed Narrative

    01

    Strategic Priorities and Leadership Changes

    Kroger is making clear progress on simplifying the organization, improving customer experience, and focusing on value creation. The company upgraded its leadership team by promoting a division president to lead brands, hiring a new Head of Product Sourcing, and welcoming a new General Counsel. These changes are part of a broader effort to build a strong leadership team and drive future success.

    02

    Cost Optimization and Business Simplification

    The company is aggressively pursuing cost reductions, including closing approximately 60 unprofitable stores and reducing the corporate administrative team by nearly 1,000 associates. A review of all noncore assets is underway to create greater focus and simplify the business. These difficult but necessary decisions are aimed at ensuring long-term success and improving the OG&A rate, which saw a 5 basis point decrease in Q2 FY26.

    03

    Customer Value Proposition and Pricing Strategy

    Kroger is enhancing its customer value proposition by making strategic price investments, lowering prices on over 3,500 incremental products, and simplifying promotions. This has led to improved customer price perception in nearly every division and sequential improvement in market share. The company is also reintroducing paper coupons to cater to non-digital customers, aiming to appeal to a broader segment and generate incremental business.

    04

    E-commerce Evolution and Profitability Focus

    E-commerce remains a top priority, with 16% growth in Q2 FY26 led by delivery. The company is conducting a strategic review to improve profitability and reduce cost to serve, focusing on leveraging its store network for faster, asset-light delivery within two hours from 97% of stores. While automated fulfillment centers perform well in high-density areas, their profitability is being evaluated in slower adoption regions, with an update expected in Q3 FY26.

    05

    AI and Modernization Efforts

    Kroger is accelerating its AI efforts, building on its long history in data and machine learning. AI is being used to achieve more competitive pricing, improve shrink, and enable faster fulfillment, including 2-hour pickup. The company sees significant opportunities for AI to deepen customer engagement, optimize operations, and enhance efficiency in areas like scheduling, planogramming, and customer personalization.

    06

    Pharmacy Business Growth and Integration

    The pharmacy business delivered another strong quarter, driven by core pharmacy scripts and growth in GLP-1s, contributing positively to ID sales by approximately 15 basis points. Management recognizes an opportunity to increase customer awareness of its pharmacy services and plans to better position pharmacy within stores, integrating it with a broader Health & Beauty Care (HBC) strategy to create a more cohesive shopping experience.

    07

    CEO Search and Business Continuity

    The Board remains actively engaged in the CEO search process, seeking candidates with critical experience, competencies, and leadership attributes. Despite the ongoing search, the company is moving forward aggressively with business initiatives across all areas to position Kroger for long-term success, ensuring continuity and progress.

    AI-generated summary of the company’s earnings call. Not investment advice.