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    KR
    Earnings call· Oct 2025(Q3 FY26)

    KROGER CO KR

    Dec 4, 2025 Source

    Executive summary

    Kroger Q3 FY26 — E-commerce Profitability and Accelerated Store Growth

    Kroger delivered strong Q3 FY26 results, driven by e-commerce growth and pharmacy performance, despite macroeconomic headwinds and a pause in SNAP benefits. The company is strategically evolving its hybrid e-commerce model to achieve profitability in 2026, while accelerating new store development and focusing on cost management and customer value. A CEO search is underway, with an announcement expected in Q1 2026.

    Highlights

    5

    • Identical sales without fuel grew 2.6% year-over-year and 4.9% on a 2-year stack basis.

    • E-commerce sales grew 17% in the quarter, driven by increased households and order frequency.

    • Adjusted EPS increased 7% to $1.05, and adjusted FIFO operating profit grew 7% to $1.1 billion.

    • E-commerce business is expected to be profitable in 2026, with an approximate $400 million profitability improvement.

    • Net total debt to adjusted EBITDA ratio improved to 1.73x, below the target range of 2.3x-2.5x.

    Concerns

    4

    • Identical sales without fuel moderated slightly due to cycling Hurricane Helene and port strike impacts, and a pause in SNAP distributions.

    • A $44 million LIFO charge resulted in a $0.04 headwind to EPS for the quarter.

    • Impairment and related charges of $2.6 billion were recorded in Q3 due to the closure of 3 automated fulfillment centers.

    • The Inflation Reduction Act is expected to lower Q4 identical sales without fuel by 30-40 basis points, though with no earnings impact.

    Guidance & targets

    8
    CategoryTargetConfidence
    Identical sales without fuel growth
    2.8% to 3.0%
    high materiality
    High
    Adjusted EPS
    $4.75 to $4.80
    high materiality
    High
    E-commerce profitability
    Profitable
    high materiality
    High
    New store builds
    Increase by 30%
    medium materiality
    High
    Share repurchase authorization completion
    Remaining $2.5 billion completed
    medium materiality
    High
    Net total debt to adjusted EBITDA ratio
    Return to 2.3 to 2.5
    medium materiality
    Medium
    Total shareholder return
    8% to 11%
    medium materiality
    Medium
    New CEO appointment
    Appoint new CEO
    high materiality
    High

    Operational metrics

    23
    E-commerce sales growth
    17%
    Q3 FY26

    Led by delivery, driven by an increase in both households and order frequency.

    E-commerce operating profit improvement
    $400 million
    FY26

    Expected to contribute to e-commerce profitability in 2026, resulting from closing 3 fulfillment centers and increasing store-based delivery.

    Adjusted FIFO operating profit
    $1.1 billion7% growth
    Q3 FY26

    Reflecting strong execution and growth.

    FIFO gross margin rate
    49 bpsincreased YoY
    Q3 FY26

    Improved primarily due to strategic actions and operational efficiencies.

    FIFO gross margin rate (adjusted)
    24 bpsincreased YoY
    Q3 FY26

    Underlying improvement after adjusting for the sale of Kroger Specialty Pharmacy.

    OG&A rate
    27 bpsincreased YoY
    Q3 FY26

    Increase primarily due to strategic investments and the sale of Kroger Specialty Pharmacy.

    OG&A rate (adjusted)
    9 bpsincreased YoY
    Q3 FY26

    Underlying increase after adjusting for the sale of Kroger Specialty Pharmacy.

    Accelerated pension contribution impact on OG&A rate
    8 bps
    Q3 FY26

    Reflects a proactive approach to reducing future liabilities and securing long-term benefits for associates.

    LIFO charge
    $44 millionvs $4 million last year
    Q3 FY26

    Increased significantly compared to the prior year.

    Net total debt to adjusted EBITDA ratio
    1.73xbelow target range of 2.3x to 2.5x
    Q3 FY26

    Provides financial flexibility for growth investments and shareholder value enhancement.

    Share repurchase authorization remaining
    $2.5 billionafter completing $5 billion ASR
    FY26

    Expected to be completed by the end of the fiscal year.

    E-commerce orders delivered within 2 hours or less growth
    >30%
    Q3 FY26

    Reflecting growing immediacy demand.

    Media business growth
    double-digit growth
    Q3 FY26

    Continues to be a meaningful contributor to profitability, with momentum expected to accelerate.

    Inflation Reduction Act impact on identical sales without fuel
    30 to 40 bpslower
    Q4 FY26

    Sales will be recorded at new reduced prices, but manufacturers will reimburse for the difference through rebates.

    LIFO headwind
    $0.07compared to what we expected at the start of the year
    FY26

    Expected for the full year, included in updated EPS guidance.

    OG&A rate outlook
    slight improvement
    Q4 FY26

    Expected to help mitigate the impact of a slight decline in FIFO gross margin rate.

    FIFO gross margin rate outlook
    slight decline
    Q4 FY26

    Expected to be partially offset by a slight improvement in OG&A rate.

    Our Brands sales growth
    outpacing national brands
    Q3 FY26

    Customers continue to choose these products for high quality and great value, contributing to improved profitability.

    Price investments
    —
    Q3 FY26

    Increased price investments, including lowering prices on another 1,000 items in Q3 and ramping up promotions, especially when SNAP benefits were held up.

    General merchandise sales
    comped negative
    Q3 FY26

    Customers are reducing discretionary purchases.

    Units improvement in core business
    improving
    Q3 FY26

    Long-term trend, despite slight deceleration in Q3 due to discretionary categories and meat.

    Units in deli
    good improvement
    Q3 FY26

    Held up well despite overall unit deceleration.

    Units in natural and organic foods
    held up really, really well
    Q3 FY26

    Reflecting continued interest in healthy and premium options.

    Industry KPIs

    9
    MetricValueDetails
    Sg a rate27 bpsbps
    Gross margin drivers49 bpsbps
    Fuel gas station economicslower
    Warehouse store club count14units
    Comparable same store sales2.6%%
    E commerce digital sales growth17%%
    Advertising retail media revenuedouble-digit growth%
    Private label own brand penetrationstrong
    Category level comps and inflation deflationmoderately increased

    Product announcements

    1
    ProductTypeDetails
    Instacart AI-powered Cart Assistantlaunch

    Deals & partnerships

    3
    InstacartExpanded relationship for third-party delivery services and AI-powered shopping capabilities.

    Instacart is Kroger's largest delivery partner, offering broad geographic reach, scale, and handling large basket sizes. Will introduce Instacart's AI-powered Cart Assistant on Kroger's website and mobile app in Q1 2026.

    DoorDashExpanded relationship for third-party delivery services.

    Fulfilled 1 million orders in its first month. Focuses on speed and convenience, ideal for quick, small basket needs, appealing to younger customers.

    Uber EatsExpanded relationship for third-party delivery services.

    Leverages Uber's existing customer base and app, offering add-on economics (grocery with restaurant orders), appealing to younger customers seeking speed and convenience.

    Capital programs

    2
    New Store Development Programunderway

    Benefit: Strengthen competitive position, expand into high potential geographies, support long-term growth.

    Accelerating expansion of store footprint. Expect to break ground on 14 new stores in Q4 FY26. Plan to increase new store builds by 30% in 2026. Focus on improving ROIC.

    E-commerce Profitability Improvement Programunderway$400 million

    Benefit: E-commerce business profitable in 2026.

    Achieved by evolving hybrid fulfillment model, closing 3 automated fulfillment centers by end of January 2026, and increasing store-based delivery.

    Risks & headwinds

    5
    Macroeconomic uncertainty and consumer cautionQ3 FY26, expected to continue in Q4 FY26

    Middle-income customers feeling increased pressure; lower-income households pulling back more aggressively; general merchandise comped negative.

    Mitigation: Delivering value through lower prices, affordable quality in Our Brands, and more promotions; focusing on running great stores and e-commerce growth.

    Government shutdown concerns and pause in SNAP benefit distributionsQ3 FY26 (final weeks)

    Added incremental pressure to Q3 identical sales without fuel, particularly later in the quarter.

    Mitigation: Increased promotions to help customers save during the period.

    Inflation Reduction Act reducing Medicare drug pricesBeginning January 1, 2026 (impacting Q4 FY26)

    Expected to lower Q4 identical sales without fuel by approximately 30 to 40 basis points.

    Mitigation: Manufacturers will fully reimburse Kroger for the difference through rebates, resulting in no impact on earnings or gross margin.

    Intensely competitive retail environmentOngoing

    Not quantified, but described as 'very competitive' especially when consumers seek value.

    Mitigation: Focus on running great stores, driving e-commerce, growing alternative profits, lowering prices (1,000 items in Q3), ramping up promotions, and leveraging strong vendor funding.

    Lower gallons sold for fuelQ3 FY26, expected Q4 FY26

    Fuel sales lower this quarter compared to last year; expected to remain lower YoY for Q4.

    Mitigation: Fuel profitability was in line with expectations, slightly ahead of last year.

    What to watch in Q4 FY26

    5

    E-commerce profitability

    FY26
    CurrentLosses cut in half in Q3 FY26
    TargetProfitable

    Why it matters

    This is a key strategic shift and a major driver of future earnings, with a stated $400M improvement.

    As a result, we now expect our e-commerce business to be profitable in 2026.

    Q&A highlights

    6

    Inquired about the cadence of the accelerated storing program, how Kroger thinks about concentrating its network, and opportunities to exit or double down in certain areas.

    Ron Sargent highlighted excitement for new store investments, with 14 groundbreakings in Q4 and a 30% increase in new store builds in 2026. He mentioned the entry into Jacksonville, Florida, with Harris Teeter as an example of expanding into adjacent markets and the long-term aspiration to be a national retailer, noting that capital allocation for new stores has been a challenge in recent years.

    “And when you look at 2026, we expect to increase new store builds by 30%.”

    asked by John Heinbockel · answered by Ronald Sargent

    2 min read7 chapters

    Detailed Narrative

    01

    E-commerce Strategy Evolution

    Kroger conducted a comprehensive review of its e-commerce model, leading to an evolution towards a hybrid fulfillment approach. This involves leveraging automated fulfillment where demand supports it and expanding store-based fulfillment via pickup and third-party delivery partners like Instacart, DoorDash, and Uber Eats. This shift aims to improve efficiency, drive profitability, and better utilize stores, with an expected $400 million profitability improvement in 2026.

    02

    Fulfillment Center Closures

    In recognition of the e-commerce strategy shift, Kroger announced the closure of 3 automated fulfillment centers by the end of January 2026, which had not met operational and financial expectations. The company expects to retain most e-commerce customers in these geographies through store-based fulfillment and in-store shopping, with a neutral impact on identical sales without fuel.

    03

    Customer Behavior and Macroeconomic Impact

    Macroeconomic uncertainty🌐 is influencing customer behavior, with a split across income groups. Higher-income households continue strong spending, while middle-income customers are experiencing increased pressure, similar to lower-income households. Consumers are making smaller, more frequent trips, cutting back on discretionary purchases, and seeking value through promotions and Our Brands products.

    04

    Store Operations and Technology Investments

    Kroger is focused on running great stores, improving internal composite scores (in-stocks, fresh quality, customer service), and investing in customer experiences like expanded store hours to reduce checkout wait times. An AI-powered workforce management platform is being utilized for better staffing. The company is also returning to in-office work 5 days a week to strengthen collaboration and accelerate decision-making.

    05

    Accelerated Store Footprint Expansion

    Kroger plans to accelerate capital investment in new stores, with 14 groundbreakings expected in Q4 and a 30% increase in new store builds in 2026. This includes expansion plans for Harris Teeter, entering Jacksonville, Florida, as an important adjacent geography to grow households and gain share. The focus is on improving ROIC and strengthening competitive position.

    06

    Cost Structure and Productivity Initiatives

    The company is actively working to take costs out of the business, focusing on procurement (cost of goods sold and goods not for resale). They are also leveraging technology and AI to simplify tasks, operate more efficiently, and build a more streamlined organization. Agentic AI capabilities, such as Instacart's Cart Assistant, are planned for introduction in Q1 2026 to enhance the customer shopping experience.

    07

    Inflation Reduction Act Impact

    Starting January 1, 2026, the Inflation Reduction Act is expected to reduce Medicare drug prices on 10 highly utilized medications by 60-70%. While this will lower Q4 identical sales without fuel by approximately 30-40 basis points, manufacturers will fully reimburse Kroger for the difference through rebates, resulting in no impact on earnings or gross margin.

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