KROGER CO Q4 FY2025 earnings call

• Focus on customer experience: Made price investments, added store hours during holidays to improve checkout times and customer satisfaction. - Simplifying the business: Announced sale of Vitacost, planned to close nearly 50 underperforming Little Clinic locations, and reviewed non-core assets. - Strong leadership team: Promoted and appointed new leaders with deep operational experience, and elevated Milan Mahadevan for AI work. - AI priority: See AI as an opportunity to improve customer experience and drive productivity, with emerging results and plans to expand capabilities like agentic shopping.

In the fourth quarter, identical sales without fuel grew 2.4%, including nearly a 40 basis point headwind from the Inflation Reduction Act. For the full year, identical sales without fuel grew 2.9%. Adjusted e-commerce sales grew 20% this quarter, and it has built into a $16 billion business. Our brands had a solid quarter, excluding the impact of egg deflation, with Simple Truth and Private Selection leading growth. E-commerce continued to be an important growth driver, and media business showed momentum.

• Identical sales without fuel expected in range of 1% - 2%, with Inflation Reduction Act creating ~130 basis point headwind, excluding it 2.3% - 3.3%. Q1 likely near low end due to egg deflation. - Adjusted FIFO operating profits expected in range of $5 billion to $5.2 billion. - Expect e-commerce to accelerate, loyalty program enhanced, capital expenditures 3.8 to 4 billion with focus on new stores, supply chain, and technology. - Adjusted free cash flow expected 2.7 to 2.9 billion, adjusted net earnings per diluted share 510 to 530.

• Impact of Inflation Reduction Act on pharmacy sales and margins. - Competition from discount-oriented competitors potentially leading to price wars. - Challenges in fully realizing AI benefits and optimizing cost structures quickly. - Uncertainties in e-commerce profitability and supply chain management.

Q: Christina Katai of Deutsche Bank asked about initiatives to accelerate top-line growth beyond price investment and runway for sourcing and procurement improvements.

A: Greg said he's in early stages, sees opportunities in cost of goods sold, imports, and Kroger Capability Centre, and David added on AI impact with early proof points and future plans.

Q: Michael Lasser of UBS asked about investment to stabilize market share and free cash flow outlook.

A: David talked about price investment focus and balancing margins, and Michael explained free cash flow and CapEx distribution with focus on new stores, supply chain, and e-commerce.

Q: Leah Jordan of Goldman Sachs asked about in-store experience opportunities and ID sales guide drivers.

A: Greg talked about early impressions of stores and potential, and David explained ID sales guide with focus on units and inflation.

Q: Simeon Goodman of Morgan Stanley asked about self-funding idea and share gain categories.

A: Greg talked about comfort in self-funding and David clarified share gain details in categories like meat, deli, and bakery.

Q: Michael Montani of Evercore ISI asked about quarterly cadence and Kroger's hallmark.

A: David talked about Q1 cadence and Greg talked about Kroger's strengths like fresh foods, convenience, and local presence.

Q: Ed Kelly of Wells Fargo asked about price gaps and speed of initiatives.

A: David talked about price gap focus and Greg talked about momentum shift and need for speed in execution.

Q: Robert Ames from Bank of America asked about e-commerce acceleration drivers and fuel business guidance.

A: David talked about e-commerce drivers and fuel business expected slight decline in gallons and profits.

Q: John Heinbockel of Guggenheim asked about value perception and center store skew rationalization.

A: Greg talked about working on value perception glide path and center store optimization ecosystem.