The Kroger Co. Q1 FY2026 earnings call

### Strategic Assessment After 100 Days of New CEO Leadership - 2 out of 5 stores are in very good condition, 2 out of 5 are moderate, and 1 out of 5 requires material performance improvement; closing the execution gap between top and bottom performing stores is a top near-term opportunity. - Operating costs have been growing faster than sales, which is unsustainable; cost reduction is the foundational starting point for all strategic initiatives. - Kroger has underinvested in new store openings while competitors expanded footprints; the company has begun ramping its new store pipeline focused on high-return markets and formats. - Pricing strategy has become overly complex, and price position has not kept pace with competition, leading to more promotional trips and fewer full-basket purchases; the goal is to become more competitively priced and simpler for customers, not the lowest price retailer. - Back-office operations are too slow and bureaucratic; the company aims to reduce organizational layers, speed up decision-making, and get more output from existing assets and talent.

### Core Strategic Priorities: The Five Fs - **Fresh**: Fresh food is the top driver of customer grocer choice; the company is raising freshness standards measured by customer experience (from shelf to home). - **Fast**: Improve in-store speed (checkout, inventory availability) and online speed (fast delivery, accurate on-time orders) to reduce customer friction and lost trips. - **Data-Driven Personalization**: Leverage Kroger's unmatched customer data to deliver personalized experiences and offers that customers actually value. - **Friendly**: Position associates as a core competitive advantage; invest in better training, tools, and support to improve consistent, friendly customer service, which is measured and managed as a core metric. - **Affordable**: Simplify pricing and sharpen price position, with all customer value investments fully funded by cost savings and efficiency gains; move toward simpler, more consistent everyday value while retaining targeted, easier-to-understand promotions.

### Key Growth Initiatives - **E-commerce**: Grow faster than the overall grocery e-commerce market, leveraging existing store footprints for store-based fulfillment to scale profitability. Closed three unprofitable standalone fulfillment centers in Q1, retaining nearly all converted households and improving profitability. - **Retail Media**: Leverage first-party loyalty data to build a high-margin long-term growth driver; recently expanded partnerships with Google (for SKU-level conversion reporting across YouTube) and TikTok (for the first retail self-service advertising integration), and is adding AI-powered capabilities for ad optimization and audience targeting. - **Cost Reduction**: Targets savings across cost of goods sold (via tougher supplier negotiations and expanded direct sourcing) and goods not for resale (via complexity reduction and better procurement). Q1 COGS savings came in 30% ahead of plan, with significant additional runway for future savings.

1. Core Grocery: Delivered 1% identical sales growth excluding fuel. Private label (our brands) outperformed national brands by 175 basis points in share gain, with strong momentum in the Simple Truth and Private Selection lines. Fresh food categories led core growth, and grocery represented an increasing share of overall company revenue mix. Adjusted FIFO operating profit for the quarter was $1.5 billion, with adjusted EPS of $1.58, representing 6% year-over-year growth. 2. E-commerce: Grew 19% year-over-year, with convenience orders delivered in under an hour accounting for ~50% of digital growth. The business, including media, turned profitable this quarter ahead of schedule, driven by the shift to lower-cost store-based fulfillment that improved profit economics. Perfect order rates improved 8% year-over-year, and the segment attracted a record number of new households. 3. Retail Media (Kroger Precision Marketing): Delivered over 20% year-over-year revenue growth, leveraging Kroger's first-party loyalty data (95% of transactions tied to loyalty cards with 20+ years of history). It contributed to the overall profitability of the e-commerce segment. 4. Pharmacy: Faced top-line headwinds of 130 basis points from the Inflation Reduction Act and 40 basis points from accelerating brand-to-generic prescription shifts, but grew profit ahead of expectations. The segment gained share in core scripts and GLP-1 prescriptions, with GLP-1 customers also driving incremental in-store grocery sales of fresh and high-protein items. 5. Fuel: Outperformed expectations, with fuel margins boosted by global oil market volatility. Total gallons sold were slightly down year-over-year, but the industry-leading fuel rewards program helped Kroger outperform industry volume benchmarks by over 400 basis points. Fuel reward redemptions grew 10% year-over-year, driving incremental in-store traffic.

- Management reaffirms its full-year 2026 guidance, with confidence supported by on-track cost savings, improving e-commerce profitability, media growth, and disciplined reinvestment. - Second quarter 2026 identical sales excluding fuel are expected to be roughly in line with the first quarter, as ongoing pharmacy headwinds and consumer spending pressure persist. Adjusted diluted net earnings per share are expected to be in line with second quarter 2025. - Earnings growth is expected to accelerate in the second half of 2026 as cost saving initiatives ramp up. Cost savings will build throughout 2026 and accelerate further in subsequent years. - Inflationary pressure is expected to increase over the course of 2026, in line with broader macroeconomic trends, and remains within the company's forecast range. - Full-year FIFO gross margin rate is still expected to be positive year-over-year, despite unexpected Q1 transportation cost headwinds. Quarterly margin results will fluctuate based on the timing of investments and savings initiatives, but the company is committed to delivering annual margin expansion. - Kroger will share a full long-term strategic and financial framework at its investor update on October 20, 2026.

- Consumer budgets remain under pressure from high gas prices and reduced SNAP benefits, leading to more deliberate spending, smaller basket sizes, selective shopping, and decelerated food-at-home market growth. - Unexpectedly high diesel prices created a 15 basis point gross margin headwind in Q1, and transportation cost pressure is expected to persist as long as oil markets remain elevated. - Pricing investments and cost cutting require consistent operational execution, and organizational change to speed up decision-making and improve store-level execution is an ongoing multi-quarter effort. - Competitive pressure from non-traditional grocery formats (warehouse clubs, supercenters, discounters) that use non-grocery profit pools to fund grocery price investments creates ongoing market share pressure.

Q: How does Kroger plan to close the execution gap between top and laggard stores, and what is your target for food volume performance? / A: Management estimates 20% of stores are underperforming, with opportunity for improvement across an additional 40% of moderate-performing stores. Closing the gap requires proactive field engagement from division and district leadership, combining on-the-ground store walks with data monitoring. Turnarounds of underperforming stores can deliver rapid sales improvements, often in a matter of weeks. Currently, Kroger has started to meaningfully outperform the traditional grocery peer benchmark on volume, its best performance in 2-3 years, with the long-term target of achieving positive food volume growth. /

Q: How large is the total cost cutting opportunity, and what areas does it cover? / A: Cost opportunities exist across every part of the business. Above the gross margin line, opportunities include reducing store shrink and improving replenishment processes. Below the gross margin line, opportunities include optimizing organizational headcount and improving operational productivity across all functions. Cost cutting work is already underway, with Q1 COGS savings 30% ahead of internal plan; savings will ramp throughout 2026 and deliver multi-year enduring benefits, and are large enough to fully fund all planned pricing and customer experience investments. /

Q: How does Kroger view its ability to compete with rivals that use non-grocery profit pools to fund grocery investments, and what drives the expected H2 profitability inflection? / A: Kroger's supermarket format (50,000-60,000 square feet) meets customer preferences that are not served by larger warehouse clubs or smaller limited-assortment discounters, and its existing store footprint is a unique advantage for efficient e-commerce fulfillment. Kroger also has a fast-growing, high-margin retail media business that is already accelerating and provides additional profit to fund investments. The H2 profitability inflection will be driven by ramping cost savings, accelerating e-commerce and media profitability, and a modest increase in industry inflation that aligns with the original annual plan. /

Q: What is the pace of planned price investments, and how does management weigh fast versus gradual execution? / A: Management is taking a surgical, thoughtful approach that balances short-term profit stability with long-term market share gain, and requires building up cost savings before ramping price investments, while also ensuring store execution improves alongside price changes. The goal is not to match discounters on price, but to reach a position where customers perceive Kroger's pricing as fair and reasonable, closing the price gap that has widened over time. Pricing tests are underway, but full details on scope and timing will be shared at the October investor update. /

Q: How are pharmacy headwinds from the Inflation Reduction Act and brand-to-generic shifts tracking for the full year? / A: The 130 basis point annual top-line headwind from the Inflation Reduction Act is playing out exactly as expected, and is neutral to profit due to the structure of drug rebates. The accelerating brand-to-generic shift is a 40 basis point Q1 top-line headwind, but is actually profit positive for pharmacy, improving the segment's margin profile. Despite top-line pressure, pharmacy is gaining share in core scripts and GLP-1s, and GLP-1 customers drive incremental high-margin fresh grocery sales in-store.