KROGER CO Q2 FY2026 earnings call

• Financial Discipline: Despite soft top-line sales due to headwinds, the company delivered on profit goals, demonstrating the strength of its operating model.
• E-commerce Growth: Adjusted e-commerce sales grew 20%, achieving profitable growth for the second consecutive quarter. New customer acquisition increased 20%.
• Retail Media Strength: Retail media revenue grew 24%, the best performance since 2021, driven by expanded inventory and optimization.
• Brand Momentum: Private brand sales grew faster than national brands. 'Private Selection' sales increased >14%, while 'Simple Truth' and 'SmartWay' also showed strong momentum.
• Value Proposition: The company is executing a multi-year plan to simplify promotions and improve shelf prices, funding value investments through cost savings.
• Operational Execution: On-shelf availability reached an all-time high. Pickup perfect orders were at record levels.
• Strategic Hires: Appointed new leadership including Emily DeMartino (CPO), Nate Faust (Chief Ecommerce Officer), and Mary Ibbotson (Chief Store Operations Officer).
• Customer Trust & Safety: Addressed the cyclospora outbreak promptly; food safety remains the highest priority. Traffic remained positive despite ticket declines.

The provided transcript does not break down financial performance by specific product segments (e.g., Grocery, Pharmacy, Fuel) in terms of absolute revenue or contribution percentages. It reports consolidated results: Identical sales without fuel grew 0.2%. Adjusted earnings per diluted share were $1.09 (5% growth YoY). Adjusted FIFO operating profit was $1.1 billion. Gross margin rate increased 13 basis points year-over-year.

• Identical Sales Without Fuel: Lowered full-year guidance to 0.2%–0.8% from the previous range of 1%–2%.
• Operating Profit: Maintained full-year adjusted FIFO operating profit guidance of $5.0 billion–$5.2 billion.
• Earnings Per Share: Maintained full-year adjusted net EPS guidance of $5.10–$5.30.
• Q3 vs Q4 Outlook: Anticipate ID sales without fuel to be slightly better in Q3 than Q4 due to lingering cyclospora effects in Q3 and weather/pharmacy headwinds in Q4.
• Pharmacy Headwinds: Expect the Inflation Reduction Act impact to accelerate to ~150 basis points in Q4; however, this will have no impact on profit in Q4 or 2027.
• Fuel Margins: Expect fuel margins to be softer in the back half compared to the first half.

• Cyclospora Outbreak: Caused a 35-basis-point drag on total company IDs without fuel, primarily affecting produce and causing higher-than-expected shrink.
• Pharmacy Regulatory Impact: The Inflation Reduction Act continues to create sales headwinds (~140 bps in Q2), projected to worsen as new high-cost drugs (GLP-1s) enter the formulary.
• Macroeconomic Pressures: Higher fuel prices (> $4/gallon), reductions in SNAP benefits, and softer consumer confidence are pressuring household budgets.
• Inflationary Costs: Management expects mounting pressure from diesel and freight costs in the second half of the year.
• Egg Deflation: Lingering price deflation in eggs contributed a 30-basis-point headwind.

Q: UBS asked how much Kroger invested in price cuts in Q2 and the status of their price gap with competitors, given the cautious outlook.

A: CEO Foran stated they are investing geographically but declined to provide exact figures, emphasizing a measured approach to layering value with operational improvements. CFO Kennerley added that FIFO gross margin performance demonstrated their ability to offset value investments with savings. They confirmed that their pricing relative to competitors on basic shelf prices has improved, and they successfully maintained their market share gap against the 'rest of market' despite fresh category headwinds.

Q: Bank of America’s Robbie Ohmes inquired about inflation pressures, specifically regarding diesel prices and the industry outlook for the back half of the year.

A: CEO Foran noted that while he expects pressure to mount from gas and diesel, the teams are managing costs effectively to prevent savings from being eroded. CFO Kennerley confirmed the outlook remains within a 1% to 2.5% CPI range, expecting slightly more pressure in H2 than H1. However, he reiterated that Kroger expects to remain below CPI and maintain positive FIFO gross margin growth by reinvesting supplier savings into customer value.

Q: Wells Fargo’s Edward Kelly asked about the strategy for simplifying pricing, reducing deals, and improving value perception versus lower shelf prices.

A: CEO Foran described this as a multi-year program executed via a 'glide path' rather than a sudden shift. He explained that savings from COGS and GNR initiatives are applied to shelf prices while adjusting the promotional mix. He emphasized that Kroger aims to offer the best value, not necessarily the cheapest price, and noted that early results show improved unit sales and engagement in categories where this approach is implemented.

Q: BMO Capital Markets’ Kelly Bania sought clarity on the core grocery comp ex-pharmacy and the impact of fresh categories on market share data.

A: CFO Kennerley broke down the 265-basis-point headwind: IRA (-140 bps), brand-to-generic shift (-60 bps), egg deflation (-30 bps), and cyclospora (-35 bps). CEO Foran highlighted that despite having a higher fresh mix which made them more vulnerable to cyclospora, they successfully widened and maintained their market share gap against competitors. He expressed encouragement that this gap held even under significant fresh-category stress.

Q: Morgan Stanley’s Simeon Gutman asked how management reconciles near-term profit protection with necessary investments for long-term growth amidst a difficult backdrop.

A: CEO Foran argued that tough conditions create opportunities for disciplined operators. He revealed that after 200 days, he sees even more opportunities to drive savings in areas like shrink, out-of-stocks, and procurement than initially anticipated. He affirmed that the team is assembled and clear on the plan, expressing confidence that they can fund investments while maintaining profitability through the rest of the year.