The Kroger Co. (KR) Q3 2026 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary suggests a positive outlook due to raised financial guidance, increased shareholder returns, and strategic initiatives like AI and e-commerce improvements. The Q&A section highlights concerns about consumer caution and competitive pressures, but these are offset by strong vendor support and strategic investments. The company's proactive measures in store expansion, digital strategy, and cost savings from fulfillment center closures further support a positive sentiment. Despite some uncertainties, the overall tone is optimistic, with a focus on growth and profitability.

Key Financial Performance

E-commerce sales $14 billion business with 6 consecutive quarters of double-digit sales growth. In Q3 2025, e-commerce sales grew 17% year-over-year, led by delivery. Reasons for growth include increased household adoption, order frequency, and partnerships with delivery providers like DoorDash, Instacart, and Uber Eats.

Identical sales without fuel Grew 2.6% year-over-year in Q3 2025, with a 2-year stack basis growth of 4.9%. Growth was led by pharmacy and e-commerce. Factors influencing growth include increased price investments, promotions, and resilience in food spending despite macroeconomic pressures.

FIFO gross margin rate Increased by 49 basis points year-over-year in Q3 2025. Reasons include the sale of Kroger Specialty Pharmacy, improved performance of private label brands, lower supply chain costs, and reduced shrink. Pharmacy sales, which have lower margins, partially offset the improvement.

Adjusted FIFO operating profit $1.1 billion in Q3 2025, reflecting 7% growth year-over-year. Growth was driven by strong execution in core grocery, e-commerce, and pharmacy businesses, despite challenges like cautious consumer spending and a pause in SNAP distributions.

Adjusted EPS $1.05 in Q3 2025, reflecting 7% growth year-over-year. Growth was supported by strong operating profit and disciplined margin management.

Media business growth Achieved double-digit growth in Q3 2025. Growth was driven by new media opportunities from partnerships with delivery providers and integration of customer data for targeted campaigns.

Fuel sales Lower year-over-year in Q3 2025 due to fewer gallons sold. However, fuel profitability was slightly ahead of the same period last year.

LIFO charge $44 million in Q3 2025, compared to $4 million in the same period last year, resulting in a $0.04 headwind to EPS.

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Operating Highlights

E-commerce: Achieved over $14 billion in business with six consecutive quarters of double-digit sales growth. Introduced a hybrid fulfillment model combining automated and store-based fulfillment. Expanded partnerships with Instacart, DoorDash, and Uber Eats for faster delivery. Closure of three underperforming automated fulfillment centers, expected to improve e-commerce profitability by $400 million in 2026.

AI-powered shopping: Plans to introduce Instacart's AI-powered Cart Assistant in Q1 2026 to enhance personalized shopping and meal planning.

Store expansion: Breaking ground on 14 new stores in Q4 2025. Expanding Harris Teeter banner into Jacksonville, Florida, and other Southeast regions. Plans to accelerate store investments beyond 2025.

Operational efficiencies: Utilizing AI-powered workforce management for better staffing and flexibility. Simplifying business operations and reviewing non-core assets. Leveraging technology and AI to streamline tasks and improve efficiency.

Cost savings: Targeting procurement and operational cost reductions, including cost of goods sold and goods not for resale.

Customer behavior insights: Adapting to macroeconomic trends with increased promotions and focus on private label brands. Observing shifts in spending patterns across income groups.

Media business: Leveraging partnerships with delivery platforms to create new media opportunities and drive profitability.

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Risk or Challenges

Macroeconomic Uncertainty: Macroeconomic uncertainty is influencing customer behavior, with middle and lower-income households feeling increased financial pressure. This is leading to smaller, more frequent trips and reduced discretionary spending, which could impact sales.

Inflation and Government Funding Uncertainty: Inflation and uncertainty around government funding, combined with the pause in SNAP benefits, added incremental pressure to sales, particularly in the third quarter.

E-commerce Fulfillment Center Closures: The closure of three automated fulfillment centers due to underperformance could lead to operational disruptions and challenges in retaining e-commerce customers in affected geographies.

Competitive Pressures: Gaining market share remains a challenge in a competitive environment, requiring increased price investments and promotions, which could pressure margins.

Labor and Workforce Management: Investments in associate wages and benefits, along with the return to in-office work, could increase operational costs and impact employee satisfaction.

Regulatory Changes in Pharmacy: The Inflation Reduction Act will reduce Medicare drug prices, impacting identical sales without fuel by 30 to 40 basis points in Q4, though it will not affect earnings.

Supply Chain and Procurement Costs: While progress has been made, there are ongoing challenges in reducing procurement costs and improving supply chain efficiency.

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Guidance & Outlook

E-commerce Profitability: Kroger expects its e-commerce business to become profitable in 2026, with approximately $400 million in e-commerce profitability improvements driven by a refreshed hybrid fulfillment model.

Store Expansion: The company plans to accelerate the expansion of its store footprint, breaking ground on 14 new stores in Q4 2025 and increasing capital investment in new stores beyond 2025 to support long-term growth.

Capital Allocation: Kroger aims to return to its target leverage ratio over time and expects to complete the remaining $2.5 billion under its share repurchase authorization by the end of the fiscal year.

Guidance for 2025: The company narrowed its identical sales without fuel growth guidance to 2.8%-3% and raised the lower end of its adjusted EPS guidance to $4.75-$4.80 for the fiscal year.

Inflation Reduction Act Impact: The act is expected to lower Q4 identical sales without fuel by 30-40 basis points due to reduced Medicare drug prices, but it will have no impact on earnings.

Technology and AI Integration: Kroger plans to introduce AI-powered shopping capabilities, such as Instacart's Cart Assistant, on its website and mobile app in Q1 2026 to enhance the customer experience.

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Shareholder Return Plan

Dividend Growth: Kroger remains committed to growing its dividend, subject to Board approval.

Share Repurchase Program: Kroger completed its $5 billion accelerated share repurchase (ASR) program under its $7.5 billion share repurchase authorization. The company is currently executing open market repurchases and expects to complete the remaining $2.5 billion under the authorization by the end of the fiscal year.

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Key Q&A

Q:Can you talk about the accelerated storing program, its cadence, and whether there are plans to exit or double down in certain markets?

A:Ronald Sargent explained that the company is excited about new investments in store growth, which drive top-line and same-store sales. They plan to complete 4 major store projects and break ground on 14 new stores in Q4. By 2026, they expect to increase new store builds by 30%. They are also entering Jacksonville with Harris Teeter and plan to expand in adjacent markets. Opportunities for growth through acquisitions remain open, and the long-term aspiration is to become a national retailer. The focus will be on filling up Jacksonville before moving to adjacent markets.

Q:What are you and the Board looking for in the CEO search?

A:Ronald Sargent stated that the process has been deliberate and thorough, with several highly qualified external candidates identified. The next CEO is expected to bring fresh perspectives, complement the existing culture, and have a deep understanding of retail transformation, customer focus, and operational success at scale. The decision is expected to be announced in Q1.

Q:How are you feeling about the current grocery ID trend and the competitive environment?

A:Ronald Sargent noted that sales came in lighter than expected due to consumer caution, government shutdown concerns, and a pause in SNAP benefits. Consumers are becoming more selective, buying on promotion, and reducing discretionary purchases. Despite this, 2-year stacked identical sales were up 20 basis points. Q4 sales are slightly ahead of guidance, but no meaningful improvement in the consumer environment is expected. The competitive environment remains strong, and the company is focused on running great stores, driving e-commerce, and growing alternative profits. Vendor funding remains strong to support initiatives.

Q:What is the impact of the pharmacy drug pricing headwind, and what tailwinds might offset it?

A:David John Kennerley explained that starting January 1, Medicare will pay 60%-70% less for the first 10 negotiated drugs, creating a headwind in sales. However, manufacturers will offer rebates to offset this, resulting in no margin or earnings impact. Tailwinds include improved unit trends in the core business, investments in price gaps, and initiatives to maintain momentum in ID sales.

Q:Can you provide more details on the impact of pharmacy on the quarter and the reinvestment of e-commerce losses?

A:David John Kennerley stated that pharmacy performance was consistent with recent quarters. There was a slight deceleration in unit trends, particularly in discretionary categories and meat due to inflation. However, deli and natural/organic foods performed well. The reinvestment of e-commerce losses will focus on pricing, store standards, and technology to improve customer experience and operating margins.

Q:How did you assess the risk of relying on third-party providers for e-commerce delivery, and what factors drive e-commerce profitability next year?

A:Ronald Sargent emphasized that third-party providers like Instacart, Uber Eats, and DoorDash bring distinct customer benefits and operational flexibility. The $400 million in savings from closing automated fulfillment centers, incremental sales from third-party partnerships, and growth in media business will drive e-commerce profitability next year.

Q:Do you expect the grocery industry's growth rate to slow in 2026?

A:Ronald Sargent stated that he does not foresee a dramatic slowdown in the grocery industry. New store growth, e-commerce acceleration, and strong performance in fresh categories and private brands are expected to drive growth.

Q:How are you structuring relationships with third-party platforms to ensure first-party data and favorable Retail Media economics?

A:David John Kennerley explained that the company structured agreements with third-party platforms to ensure participation in media opportunities originating on their platforms. The agreements are favorable to Kroger's economics, and Retail Media continues to show double-digit growth.

Q:Can you provide more details on Q4 trends and price investments?

A:Ronald Sargent mentioned that Q4 trends are slightly ahead of guidance, but it is too early to draw conclusions. Price investments, such as lowering the cost of Thanksgiving dinner, are being made responsibly to offer value to consumers.

Q:What is the scalability of e-commerce profitability, and is there a sense of urgency in recent strategic changes?

A:David John Kennerley stated that e-commerce profitability will continue to improve with strong double-digit growth. Ronald Sargent emphasized that urgency is always present, and the focus is on making tough decisions and moving quickly to set up the company for future success.

Q:Where will the $400 million in savings from fulfillment center closures be seen, and how will it be reinvested?

A:David John Kennerley explained that the $400 million in savings will be split between operating profit and depreciation. The savings will fund both planned and incremental investments in pricing, customer experience, and technology.

Q:Does the shift in consumer sentiment impact Fred Meyer, and how is store development being approached?

A:Ronald Sargent noted that consumer sentiment has declined, leading to cautious spending and a focus on food over discretionary categories, which may impact Fred Meyer. Store development will include large and mid-sized formats, with continued experimentation to meet consumer needs.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the breakdown of the $400 million in savings from fulfillment center closures, the exact allocation of reinvestments, and the anticipated growth rate of the grocery industry in 2026. Additionally, responses about the CEO search and e-commerce profitability lacked precise timelines and metrics.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

KR Transcript

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The earnings call summary indicates a positive outlook with raised sales guidance, increased store projects, AI implementation, and a significant share repurchase program. The Q&A section reinforces this with discussions on managing pharmacy headwinds, e-commerce profitability, and strong retail media relationships. Despite lighter sales due to consumer caution, the overall sentiment is positive with responsible price investments and continued growth in key areas. The raised financial guidance and increased shareholder returns further support a positive stock price movement.

The Kroger Co. (KR) Q3 2026 Earnings Call Transcript

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The earnings call summary shows positive signs: raised sales guidance, strong e-commerce growth, and a major share repurchase plan. However, the Q&A reveals some uncertainties, such as margin pressures and lack of specifics on e-commerce profitability. Despite these concerns, the overall outlook is optimistic with raised sales guidance and strategic focus on high-growth areas, suggesting a positive stock reaction.

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The earnings call summary shows a strong financial performance with raised sales guidance and a $5 billion share repurchase plan. The Q&A section reveals optimism in e-commerce growth and cost efficiencies, despite some challenges like pharmacy mix pressures. The company is focused on long-term value with strategic initiatives and expects stable margins. Overall, the positive elements outweigh the negatives, suggesting a likely positive stock price movement in the short term.

KR Report

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