Kroger's 2025 Earnings Calls Reveal Contradictions in Pricing Strategy, E-commerce Profitability, and Store Closures

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

Date of Call: September 11, 2025

Financials Results

• EPS: Adjusted EPS $1.04, up 12% YOY
• Gross Margin: FIFO gross margin rate ex. rent/D&A, fuel and adjustments increased 39 bps YOY; excluding Specialty Pharmacy sale, decreased 9 bps YOY

Guidance:

• FY identical sales (ex-fuel) raised to 2.7%–3.4%; Q3 expected slightly below the midpoint
• FY adjusted FIFO operating profit: $4.8–$4.9B (raised low end)
• FY adjusted EPS: $4.70–$4.80 (raised low end)
• Underlying gross margin rate expected relatively flat for the year
• Fuel gallons/profitability to remain a headwind through 2025
• Pharmacy to grow faster than the rest of business (mix pressure, dollar benefit)
• Food inflation assumption: 1.5%–2.5% for 2025
• $5B ASR to complete in Q3; resume open-market buybacks under remaining $2.5B by year-end
• 30 major store projects in 2025; 2026 openings to rise ~30%
• E-commerce strategic review update expected in Q3; focus on path to profitability

Business Commentary:

• Sales Growth and E-commerce Expansion:
• Kroger reported identical sales without fuel growth of 3.4% for Q2, marking the sixth consecutive quarter of improvement.
• E-commerce sales grew by 16%, led by strong performance in both delivery and pickup orders.

• The growth was driven by increased adoption of delivery services and strategic investments in price reductions and promotions.

• Pharmacy and Profitability:

• Kroger's pharmacy business delivered another strong quarter, with growth in GLP-1s and core pharmacy scripts.
• The pharmacy sales positively impacted gross profit dollars but affect the overall margin rate.

• The success in pharmacy sales is attributed to the continued return of ESI customers and strong growth in GLP-1 prescriptions.

• Cost Optimization and Store Operations:

• Kroger achieved a 5 basis points improvement in the operating, general, and administrative rate, excluding fuel and adjustment items.
• The company is closing approximately 60 unprofitable stores and has reduced corporate administrative team by nearly 1,000 associates.

• These actions are part of Kroger's strategy to simplify operations, reduce costs, and improve efficiency.

• Fresh Category Leadership:

• The fresh categories, particularly meat and produce, outpaced center store sales, reflecting increasing demand for healthier options.
• There was a strategic focus on price investments, leading to improved grocery volume and customer price perception.
• The fresh category success is driven by strong customer interest in quality fresh products and competitive pricing strategies.

Sentiment Analysis:

• Identical sales ex-fuel grew 3.4% and marked a sixth consecutive quarter of improvement. Adjusted EPS rose 12% YOY. E-commerce sales up 16% with delivery surpassing pickup. OG&A rate improved (underlying -41 bps). Guidance increased for IDs, operating profit, and EPS. Management cited improved customer price perception, Our Brands outpacing national brands, and strong pharmacy growth. Headwinds include fuel and pharmacy mix, but cost savings and sourcing initiatives provide offset.

Q&A:

• Question from Leah Jordan (Goldman Sachs): How will using stores more for e-commerce fulfillment impact timing, costs, capacity, labor, and the role of CFCs?
  Response: Kroger already fulfills most online orders from stores; minimal rework needed; delivery demand now exceeds pickup; strategic review nearly complete with an asset-light, store-led model and update coming in Q3.

• Question from Leah Jordan (Goldman Sachs): On price investments (3,500 items), what’s the competitive backdrop, price gaps, and margin impact?
  Response: Pricing remains rational; Kroger will keep lowering prices and narrowing gaps while balancing with cost savings to maintain margin neutrality.

• Question from Rupesh Parikh (Oppenheimer): Can you sustain 3%+ ID momentum?
  Response: Confidence within the raised ID guidance, though H2 comps are tougher; focus remains on improving grocery volumes with simpler promotions and better execution.

• Question from Rupesh Parikh (Oppenheimer): Retail media trends—has growth accelerated and why?
  Response: Yes, slight acceleration; differentiated offering and refined client engagement support continued growth.

• Question from Simeon Gutman (Morgan Stanley): What drove the sequential comp improvement—units or ticket?
  Response: Units improved more than pricing; inflation moderated; grocery units are nearly flat YOY.

• Question from Simeon Gutman (Morgan Stanley): Any move to strict EDLP pricing architecture?
  Response: No; Kroger remains a promotional retailer but will sharpen everyday prices and simplify pricing.

• Question from Michael Lasser (UBS): With intensifying competition, how much margin improvement is left?
  Response: Meaningful runway via pricing, Our Brands, e-commerce, sourcing, OG&A, and modernizing operations.

• Question from Michael Lasser (UBS): Unpack second-half margins/below-the-line puts and takes.
  Response: Consumer uncertainty, pharmacy mix pressure, and fuel headwinds offset IDs; minor tax changes raised the low end of profit/EPS guidance.

• Question from Seth Sigman (Barclays): E-commerce incrementality and shorter delivery windows—what are you seeing?
  Response: New households and higher order frequency drive growth; omnichannel customers are more valuable; consumers want faster (≤2-hour) delivery and will pay for it.

• Question from Seth Sigman (Barclays): Pharmacy uplift to IDs and vaccine outlook?
  Response: Vaccine approvals are delayed but should normalize later; pharmacy trips add incremental spend across the store.

• Question from Thomas Palmer (JPMorgan): How will FIFO gross margin ex-fuel trend in the second half?
  Response: Full-year underlying gross margin expected to be relatively flat; core margins are healthy excluding pharmacy mix.

• Question from Thomas Palmer (JPMorgan): CEO search and pace of decisions absent a permanent CEO?
  Response: No slowdown; initiatives are advancing; board seeks an experienced leader with strong operational and people skills.

• Question from Edward Kelly (Wells Fargo): How should we think about LIFO in the back half?
  Response: Q2 included a catch-up to reset accruals; the incremental charge isn’t a straight run rate for H2.

• Question from Edward Kelly (Wells Fargo): Why not raise free cash flow guidance?
  Response: Balancing uncertainty, pharmacy mix, and planned investments; thus FCF guidance remains unchanged.

• Question from John Heinbockel (Guggenheim): Sizing the sourcing opportunity and what changes are needed?
  Response: Large opportunity across COGS and indirect; new sourcing leader in place; simplifying promos and reducing cost-to-serve with CPGs; no size/timing disclosed yet.

• Question from John Heinbockel (Guggenheim): How will you speed delivery beyond 2 hours and role of ESLs?
  Response: Leveraging AI for multi-order picking, rolling out electronic shelf labels, and dedicated pick areas; sub-2-hour possible with higher fees.

• Question from Robert Ohmes (BofA Securities): Impact of paper coupons and any changes to fuel rewards?
  Response: Paper coupons lift units and broaden access for non-digital shoppers; positive customer feedback; no changes to fuel rewards planned.

• Question from Jacob Aiken-Phillips (Melius Research): How will you boost pharmacy awareness and integration?
  Response: Reposition pharmacy in-store and integrate with HBC as a destination, leveraging loyalty; see share gains from competitor closures.

• Question from Jacob Aiken-Phillips (Melius Research): Concrete AI use cases and rollout strategy?
  Response: AI tool reduced shrink and improved inventory; expanding to sales opportunities (seasonal), plus scheduling, planograms, and personalization to drive efficiency and growth.

• Question from Michael Montani (Evercore ISI): Potential profit impact from e-commerce strategic review and inclusion in guidance?
  Response: Not quantified; update coming in Q3; any impact is not included in current guidance.