Kroger's Q2 2026: Contradictions Emerge on Pricing Strategy, E-commerce Fulfillment, Retail Media Growth, and Digital Profitability

The above is the analysis of the conflicting points in this earnings call

Date of Call: None provided

Financials Results

• EPS: $1.04 adjusted EPS, up 12% YOY
• Gross Margin: FIFO gross margin rate (ex rent, D&A, fuel, adjustments) increased 39 bps YOY; excluding sale of Kroger Specialty Pharmacy, decreased 9 bps YOY

Guidance:

• Full-year identical sales (ex fuel) raised to 2.7%–3.4%.
• Q3 identical sales (ex fuel) expected slightly below the midpoint of full-year range.
• Adjusted FIFO operating profit range raised (low end) to $4.8B–$4.9B.
• Adjusted EPS range raised (low end) to $4.70–$4.80.
• Underlying gross margin rate expected to be relatively flat for the full year.
• Fuel gallons to remain lower YOY for the remainder of 2025, a profit headwind.
• E-commerce strategic review update expected in Q3; not included in guidance.

Business Commentary:

* Sales Growth and Strategic Pricing: - Kroger reported identical sales without fuel growth of 3.4% in Q2, marking the sixth consecutive quarter of improvement. - Growth was driven by strong performance in pharmacy, e-commerce, and fresh categories, as well as strategic pricing investments that improved price perception and customer value.

• E-commerce Expansion and Profitability:
• Kroger's e-commerce business achieved 16% growth in the second quarter, with improvements in both pickup and delivery profitability.

• This success is attributed to increased order frequency and household penetration, along with strategic customer engagement and delivery experience enhancements.

• Cost Optimization and Margin Management:

• Kroger's FIFO gross margin rate improved by 39 basis points in Q2 compared to the previous year, driven by cost savings and lower supply chain costs.

• The company is focusing on balancing price investments with margin initiatives to maintain stable gross margins amid changing market dynamics.

• Store Improvement and Customer Engagement:

• Internal composite scores for store metrics like in-stock levels, fresh product quality, and customer service showed consistent quarter-over-quarter improvement.
• Kroger is enhancing the shopping experience by focusing on store conditions and digital engagement, leading to better customer satisfaction and retention.

Sentiment Analysis:

• Management reported 3.4% identical sales ex fuel (sixth consecutive quarter of improvement), 16% e-commerce growth, and 12% YOY adjusted EPS growth. Guidance for identical sales, operating profit, and EPS was raised. They highlighted OG&A rate improvement and stable underlying gross margin while investing in price and simplifying promotions.

Q&A:

• Question from Leah Jordan (Goldman Sachs): How will you implement more store-based e-commerce fulfillment—timing, cost, capacity, labor—and how does it balance with the CFC network?
  Response: Stores already fulfill most orders; minimal rework needed; delivery now exceeds pickup; asset-light, faster delivery; CFCs under review with update in Q3.

• Question from Leah Jordan (Goldman Sachs): On price investments—3,500 more items—what’s changed competitively, and can you stay margin neutral?
  Response: Pricing remains rational; continuing to narrow price gaps with simpler promos; target margin neutrality via cost savings while investing in everyday prices.

• Question from Rupesh Parekh (Oppenheimer): With two quarters above 3% IDs, can you sustain momentum?
  Response: Confident within raised ID range; comps get tougher in H2, but two-year stacks remain healthy; focus on volume with responsible price investments.

• Question from Rupesh Parekh (Oppenheimer): Retail media looks better—what’s driving it?
  Response: Slight acceleration driven by a differentiated offering and refined client engagement; seen as a meaningful growth and profit contributor.

• Question from Simeon Gutman (Morgan Stanley): What drove the sequential comp improvement—ticket vs. volume? And any shift to EDLP?
  Response: Unit trends improved more than inflation; no move to EDLP—remain promotional but sharper, simpler everyday pricing.

• Question from Michael Lasser (UBS): With intensifying grocery competition, how far can you improve while holding ~3.1% margin?
  Response: Significant runway from sourcing, Our Brands, e-commerce and OG&A efficiencies; pricing remains rational; simplifying to fund investments.

• Question from Michael Lasser (UBS): Help unpack H2 guidance—margins and below the line?
  Response: H2 faces tougher comps, pharmacy mix pressure, and fuel headwinds; monitoring consumer; modest tax tweaks lifted the floor but not the top end.

• Question from Seth Sigman (Barclays): E-commerce growth incrementality—new vs. existing customers? What’s driving faster delivery demand?
  Response: Adding new households and higher order frequency; e-comm entry boosts total ecosystem spend; consumers value freshness, completeness, and sub-2-hour speed.

• Question from Thomas Palmer (JPMorgan): Trajectory for FIFO gross margin ex fuel in H2? And CEO search impact on decisions?
  Response: Expect underlying gross margin to be relatively flat for the year; continuing initiatives unabated while search continues.

• Question from Ed Kelly (Wells Fargo): LIFO charge was higher—how to think about H2? And why not raise free cash flow guidance?
  Response: Q2 included a LIFO catch-up and updated run-rate; FCF guide held due to uncertain consumer, pharmacy mix, fuel headwinds, and reinvestment priorities.

• Question from Jon Heinbockel (Guggenheim): Size/timing of sourcing opportunity? And how to further speed delivery (ESL, picking)?
  Response: Sourcing (COGS and indirect) is a large, multi-year opportunity under new leadership; speeding via AI-enabled picking, ESL rollout, and optimized in-store processes.

• Question from Robert Ohmes (Bank of America): Impact of reintroducing paper coupons for non-digital shoppers; any changes to fuel rewards?
  Response: Paper coupons are lifting units and improving satisfaction among less digital shoppers; no immediate changes to fuel rewards.

• Question from Jacob Eichenfelips (Melius Research): How will you drive pharmacy awareness and leverage AI?
  Response: Plan to better integrate pharmacy with health/beauty and loyalty; AI already cutting shrink and improving inventory, with expansion to pricing, labor, and personalization.

• Question from Michael Montani (Evercore ISI): Potential profit impact from the e-commerce strategic review, and is it in guidance?
  Response: Path-to-profitability details coming in Q3; potential impact not included in current guidance.