Kroger's Q1 2026: Contradictions Emerge on Pricing Strategy, E-commerce Integration, and Competitive Environment

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

Date of Call: September 11, 2025

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; down 9 bps YOY excluding the Kroger Specialty Pharmacy sale.
• Operating Margin: Adjusted FIFO operating profit $1.1B; OG&A rate decreased 5 bps YOY (41 bps underlying improvement).

Guidance:

• FY identical sales ex fuel raised to 2.7%–3.4%; Q3 slightly below FY midpoint.
• FY adjusted FIFO operating profit guided to $4.8B–$4.9B (raised floor).
• FY adjusted EPS guided to $4.70–$4.80 (raised floor).
• Underlying gross margin rate expected relatively flat for FY.
• Fuel gallons/profitability to remain lower YOY in 2025.
• $5B ASR to complete in Q3; resume open-market buybacks to use remaining $2.5B by FY-end.
• 30 major store projects in 2025; ~30% more openings in 2026.
• E-commerce strategic review update expected in Q3; path-to-profitability focus.

Business Commentary:

* Sales and E-commerce Growth: - Kroger reported identical sales without fuel growth of 3.4%, marking a sixth consecutive quarter of improvement. - This growth was driven by strong performance in pharmacy, e-commerce, and fresh categories, with pharmacy sales having a positive impact on margins.

• Cost Optimization and Margin Management:
• Kroger's FIFO gross margin rate increased by 39 basis points compared to the same period last year, excluding fuel and adjustment items.

• The improvement was primarily due to the sale of Kroger Specialty Pharmacy and lower supply chain costs, although mix effects from pharmacy sales impacted the rate.

• Pharmacy and E-commerce Momentum:

• The pharmacy business delivered strong growth, driven by core pharmacy scripts and growth in GLP-1s. E-commerce also grew by 16%.

• Improved pharmacy sales contributed positively to ID sales, while e-commerce growth was led by delivery orders, with a focus on enhancing profitability.

• Customer Engagement and Pricing Strategy:

• Kroger has made strategic price investments, lowering prices on more than 3,500 incremental products, leading to improved price spreads against competitors.
• This strategy aims to simplify pricing, increase customer engagement, and improve customer price perception, contributing to sequential share improvements.

Sentiment Analysis:

• ID sales ex fuel +3.4%, ahead of expectations; adjusted EPS +12% YOY; e-commerce +16% with improving profitability; OG&A rate improved; raised FY ID, operating profit, and EPS guidance floors; dividend raised 9%; net leverage 1.63 below 2.3–2.5 target. Management cited ongoing cost savings, AI-driven efficiencies, and strong pharmacy momentum (ESI return added ~15 bps to IDs).

Q&A:

• Question from Leah Jordan (Goldman Sachs): How will greater use of stores for e-commerce fulfillment affect timing, costs, capacity, labor, and the CFC network?
  Response: Kroger already fulfills most e-com via stores; delivery surpassed pickup; minimal store rework needed; asset-light approach focused on faster delivery; CFCs under review with an update in Q3.

• Question from Leah Jordan (Goldman Sachs): Have price investments (3,500 items) changed your competitive stance; is it margin-neutral?
  Response: Pricing remains rational; Kroger will keep lowering everyday prices and narrowing competitive gaps while balancing with cost savings to stay margin-responsible.

• Question from Rupesh Parikh (Oppenheimer): Can you sustain ~3%+ ID momentum?
  Response: Confidence within raised range; 2H comps are tougher; focus remains on volume gains via sharper pricing, simpler promos, and better execution.

• Question from Rupesh Parikh (Oppenheimer): Retail media trends and drivers?
  Response: Offer resonates; saw slight acceleration; refining client engagement; expect continued growth and contribution to profitability.

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

• Question from Simeon Gutman (Morgan Stanley): Any move to EDLP and thoughts on back-half strength?
  Response: No shift to EDLP; remain a promotional retailer but sharper and simpler; 2H reflects tougher comps while balancing volumes and margins.

• Question from Michael Lasser (UBS): How much internal improvement remains to protect margins amid increased competition?
  Response: Significant runway in pricing, Our Brands, e-commerce, sourcing, OG&A, and operating model modernization to support margin improvement.

• Question from Michael Lasser (UBS): Back-half margin/below-the-line puts and takes?
  Response: Consumer uncertainty, pharmacy mix headwind to rate but dollar positive, fuel headwinds, minor tax benefit; offset by cost efficiencies—thus raising the floor but not the top end.

• Question from Seth Sigman (Barclays): Is e-commerce growth incremental (new vs existing customers) and why faster delivery?
  Response: Adding households and orders; e-com entry increases total ecosystem spend; customers value speed and pay for 2-hour delivery.

• Question from Seth Sigman (Barclays): Pharmacy cross-shopping and vaccine outlook?
  Response: Pharmacy trips are incremental to grocery; vaccine approvals delayed but expected to normalize later this year.

• Question from Thomas Palmer (JPMorgan): Outlook for FIFO gross margin ex fuel in 2H?
  Response: Expect underlying gross margin rate to be relatively flat for FY; core margins healthy excluding pharmacy mix.

• Question from Thomas Palmer (JPMorgan): CEO search traits and whether initiatives are paused?
  Response: No slowdown; initiatives proceeding; seeking an experienced leader with strong operational and people skills.

• Question from Edward Kelly (Wells Fargo): How to think about LIFO in 2H?
  Response: Q2 included catch-up to reset accruals plus ongoing run-rate; don’t extrapolate the incremental—split between catch-up and ongoing.

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

• Question from John Heinbockel (Guggenheim): Sizing and timing of sourcing opportunity?
  Response: Large opportunity across COGS and indirects; new sourcing leader in place; working with CPGs to simplify; sizing/timing not disclosed.

• Question from John Heinbockel (Guggenheim): How to further speed delivery (tech/ESL)?
  Response: Leveraging AI for multi-order picking, rolling out electronic shelf labels, and using dedicated pick areas; sub-2-hour available with higher fees.

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

• Question from Jacob Aiken-Phillips (Melius Research): Raising pharmacy awareness and cross-shopping with HBC?
  Response: Repositioning pharmacy and integrating with HBC as a ‘shop’; leverage loyalty; capitalize on competitor closures to gain share.

• Question from Jacob Aiken-Phillips (Melius Research): Concrete AI examples and rollout strategy?
  Response: AI tool reduced shrink and boosts sell-through; expanding to personalization, scheduling, planograms, and operational efficiency.

• Question from Michael Montani (Evercore ISI): Profit impact from the e-com strategic review and inclusion in guide?
  Response: Will outline path to profitability and timing after review; not included in current guidance.