KROGER CO Q3 FY2025 earnings call

• E-commerce strategic review: Conducted a comprehensive review leading to evolving hybrid fulfillment model, closing 3 underperforming automated fulfillment centers by Jan 2026, leveraging store-based fulfillment and third-party delivery partners. - Store operations: Invested in experiences like adding store hours, using AI-powered workforce management, and seeing improvements in customer wait times. - Brand performance: Brands' sales outpaced national brands, with premium lines Simple Truth and Private Selection being strong performers. - E-commerce growth: 17% growth this quarter, with pickup and delivery showing improved profitability, and DoorDash partnership successful with 1 million orders in first month. - Store footprint expansion: Expect to break ground on 14 new stores in Q4, accelerating store activity; expansion plans for Harris Teeter in Southeast and Jacksonville, FL. - Cost-cutting: Focus on procurement, leveraging technology and AI for efficiency, and returning to in-office work 5 days a week. - Technology adoption: Plan to introduce AgenTeq shopping capabilities on website and app in 2026, enhancing customer experience.

E-commerce: Grew 17% this quarter, with delivery leading growth. Pharmacy and e-commerce led identical sales without fuel growth of 2.6% year-over-year, accelerating to 4.9% on a two-year stack basis. Brands had strong quarter with sales outpacing national brands, particularly Simple Truth and Private Selection. Store operations: Internal composite scores measuring in-stocks, fresh quality, and customer service showed steady improvement. E-commerce revenue contribution: Not explicitly stated as a percentage, but e-commerce sales grew 17% and is a key growth driver.

• Identical sales without fuel growth: Narrowed range to 2.8% - 3%. - Adjusted EPS: Raised lower end to $4.75 - $4.80. - E-commerce profitability: Expect e-commerce business to be profitable in 2026, with $400 million in e-commerce profitability improvements expected. - Impact of Inflation Reduction Act: Expected to lower Q4 identical sales without fuel by 30 - 40 basis points, but no impact on earnings. - Fuel sales: Expect lower gallons sold in Q4 year-over-year.

• Macroeconomic uncertainty: Influencing consumer behavior with split spending across income groups, middle-income customers cutting back on discretionary purchases. - Competition: Competitive retail environment, especially as consumers seek great value. - Pharmacy drug pricing: Impact of Inflation Reduction Act on Medicare drug prices, though manufacturers will provide rebates to offset impact.

Q: Talk about the accelerated storing program, cadence, and portfolio considerations A: Ron Sargent mentioned they are excited about new store investments, plan to break ground on 14 stores in Q4, expect to increase new store builds by 30% in 2026, and are excited about entry into Jacksonville with Harris Teeter, noting concentration is important and they see opportunities to grow stores including through acquisition Q: Thoughts on CEO search, what's being looked for A: Ron Sargent said next CEO will be external, looking for deep understanding of retail transformation, close to customer, demonstrated success operating at scale, and cultural fit; expect announcement in first quarter Q: Current grocery ID trend, competitive environment, and maintaining gross margins A: Ronald Sargent noted consumer caution and uncertainty, pause in SNAP benefits, consumers being more selective and buying more on promotion; David John Kennerley added share trends improved in quarter, and gross margin managed responsibly with mix on brands, sourcing improvements, and shrink control Q: Impact of pharmacy on quarter, core grocery business, and e-commerce reinvestment A: David John Kennerley said pharmacy performance similar to recent quarters; on core business, unit trends saw slight deceleration in Q3 with discretionary categories and meat impacted, but deli and natural/organics held up; on e-commerce reinvestment, details to be provided in 2026 guidance but focus on pricing and store standards Q: E-commerce profitability, reliance on third-party providers, and grocery industry growth A: David John Kennerley said e-commerce profitability improved with quarter-over-quarter cuts in losses, $400 million expected from closures and new partnerships; Ron Sargent discussed benefits of third-party providers for operational and strategic flexibility; Ron noted not qualified to speak on grocery industry growth rate for 2026 but sees opportunities in new stores, e-commerce, and brands Q: Retail media business, partnerships, and economics A: David John Kennerley said retail media business had double-digit growth in Q3, sees strong Q4 performance, structured partnerships to benefit from media opportunities on third-party platforms in a favorable economic way Q: Quarter-to-date performance, price investments, and what's working/ not working A: Ronald Sargent said quarter-to-date trending ahead of guidance, price investments ongoing with customers responding to promotions; details on what's working/ not working hard to determine in real-time but focus on providing value Q: E-commerce scalability, urgency of execution, and new CEO impact A: David John Kennerley said e-commerce now profitable with strong growth, expects continued double-digit growth; Ron Sargent said urgency is part of culture, focus on setting company up for future success, and new CEO expected to continue execution with support from board and management team Q: E-commerce profitability scalability, store development, and consumer trends A: David John Kennerley discussed e-commerce profitability scaling with strategic review outcomes; Ron Sargent talked about consumer trends with middle-income customers pulling back, focus on food items over discretionary, and Fred Meyer performing well; on store development, shift in CapEx mix to more store building for better ROIC Q: Consumer trends, Fred Meyer, and general merchandise exposure A: Ronald Sargent said consumer sentiment declined, middle-income customers pulling back, focus on food items; Fred Meyer continues to perform well, and Fred Meyer has a higher mix of discretionary and general merchandise, which may be impacted by consumer trends