Kroger Q2 2026 Earnings Call Transcript

Key Takeaways

  • Positive Sentiment: The company reported 3.4% identical sales without fuel growth in Q2—its sixth straight quarterly improvement—driven by pharmacy, e-commerce and fresh categories.
  • Positive Sentiment: Kroger lowered prices on 3,500+ products, simplified promotions and reintroduced paper coupons, leading to improved customer price perception across nearly every division.
  • Positive Sentiment: E-commerce sales rose 16% in the quarter, with delivery volumes surpassing pickup and both channels demonstrating quarter-over-quarter profitability gains.
  • Neutral Sentiment: Cost-cutting measures included closing approximately 60 unprofitable stores, reducing nearly 1,000 corporate roles and reviewing noncore assets, contributing to a 41 bps OG&A rate improvement (ex-pharmacy sale).
  • Neutral Sentiment: The company is accelerating use of AI—for competitive pricing, shrink reduction and faster fulfillment—while planning 30 new store openings in 2025 and targeting a 30% increase in 2026 and reviewing its automated fulfillment network.
AI Generated. May Contain Errors.
Earnings Conference Call
Kroger Q2 2026
00:00 / 00:00

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Operator

Good morning, and welcome to the Kroger Co. Second Quarter twenty twenty five Earnings Conference Call. Please note this event is being recorded. I'd now like to turn the conference over to Rob Quast, Vice President, Investor Relations. Please go ahead.

Rob Quast
Rob Quast
VP - IR at The Kroger Co

Good morning. Thank you for joining us for Kroger's second quarter twenty twenty five earnings call. I am joined today by Kroger's Chairman and Chief Executive Officer, Ron Sargent and Chief Financial Officer, David Kennerly. Before we begin, I want to remind you that today's discussions will include forward looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially.

Rob Quast
Rob Quast
VP - IR at The Kroger Co

A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger Company assumes no obligation to update that information. After our prepared remarks, we look forward to taking your questions. In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to one question and one follow-up question if necessary. I will now turn the call over to Ron.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Thank you, Rob. Good morning, everyone. Thank you for joining our call today. We're happy to report another quarter of strong results, which demonstrates the clear and measurable progress we're making on our key priorities: to simplify the organization, to improve the customer experience and to focus on work that creates the most value.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Today, I want to talk about what we've accomplished, the proof points we see in our quarterly results and how our priorities are positioning Kroger for sustained long term growth. Over the last several months, we've made good progress to position the company for future success. A key part of that success is a strong leadership team. And during the quarter, we continued to upgrade our team. We promoted a top division president to lead our brands, one of our key growth initiatives.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

We hired a new Head of Product Sourcing, who will help us lower our cost of goods sold and close the gap with the industry's best in class. We welcomed a new General Counsel, and we continue to elevate strong retail leaders across the company, including several new division presidents. As we continue to build our leadership team, we're also looking at our costs, especially those expenses that don't directly support our priorities or deliver value to our shareholders. As we shared last quarter, we've begun closing approximately 60 unprofitable stores. Last month, we also reduced our corporate administrative team by nearly 1,000 associates.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

While these decisions are difficult, they're also necessary for the company's long term success. Additionally, in order to create greater focus and simplify our business, we're reviewing all noncore assets to determine their ongoing contribution and role within the company. And finally, we recently put an issue behind us by reaching a legal settlement with C and S Wholesale Grocers. We are pleased to resolve the claims so that we can remain focused on serving our customers and running great stores. Our efforts to create greater focus are showing up in today's second quarter results.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Identical sales without fuel grew 3.4%, which was ahead of our expectations. This is our sixth consecutive quarter of identical sales without fuel improvement. Sales growth was led by pharmacy, e commerce and fresh categories. We know that fresh products are important to our customers, specifically in meat and produce. These categories continue to outpace center store sales and reflect the growing demand for healthier options.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Our sales growth in fresh category shows that we're making strong progress in the categories our customers care most about. Improving grocery volume is also important to us. We're making strategic price investments, which led to another quarter of sequential improvement. In fact, since the beginning of the year, we've lowered prices on more than 3,500 incremental products across our stores, which is improving our price spreads against our major competitors. As we lower prices for our customers, we're committed to doing so in a way that keeps our gross margins stable.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

We're making our promotions simpler and have continued to reduce complex promotional offers. Additionally, we're making it easier for non digital customers to take advantage of all the value Kroger offers by reintroducing paper coupons in every store. Our customers are recognizing these changes, and they're giving us credit for them. We know this because customer price perception improved in nearly every division this quarter, and we saw another quarter of sequential improvement in share. Beyond the price of the shelf, families are also looking for quality and value.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Our Brands products had another strong quarter with sales growth again outpacing national brands. Our brands offer unique products with high quality and represent a point of differentiation for Kroger. Simple Truth and Private Selection brands again led our growth. Looking ahead, we see our brands as a critical strategic asset, helping us grow sales and build loyalty with customers. E commerce.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

E commerce also continues to be an important and growing part of our business. Sales were strong in the second quarter with 16% growth, led by good performance in delivery. We continue to make progress on improving profitability, and we saw improvements in both pickup and delivery profitability on a quarter over quarter basis. E comm remains a top priority for us. Running great stores is also critical to our future, and our store teams are delivering on the basics: being in stock, showing clean and uncluttered aisles and making shopping easier for our customers.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Our internal composite scores, which track key metrics like in stock levels, fresh product quality and customer service are showing consistent quarter over quarter improvement. And as we are improving our store and e commerce shopping experiences, we're also taking meaningful steps to reduce our cost structure. In the second quarter, we were pleased with our OG and A rate improvement, and we'll continue to aggressively look for ways to reduce costs throughout the company. We believe that many cost opportunities remain. So to summarize, we've made strong progress so far this year, and we also know that we have a lot more work to do.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Looking ahead, we're focused on investments that will grow our core business. The first of these is new stores. We're on track to deliver 30 major storing projects in 2025, and we're accelerating new store projects with more efficient layouts and faster construction timelines. In 2026, we expect to increase store openings by 30%, helping us grow both in store and online sales faster. While we are growing our physical footprint, we're also modernizing our business to operate more efficiently and serve customers better.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Artificial intelligence is one of the key tools to help us get there. Accelerating our AI efforts is a natural step for Kroger, given our long history of leadership in data and machine learning. Where we've implemented AI in different parts of the organization, we're seeing results with more competitive pricing, shrink improvements and faster fulfillment, which enables two hour pickup for customers. These are just a few examples of what AI is doing to help us better serve our customers with more and bigger opportunities ahead to both support our associates and improve the customer experience. E commerce will also continue to have a meaningful and growing impact on our financial results, which is why we announced a thorough strategic review last quarter.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

We are progressing with two key objectives in mind. First, we will improve the customer experience by using our stores to deliver groceries faster. Stores are our most important asset. And when we use our stores to fulfill online orders, the inventory is closer to customers and the last mile delivery costs are lower. As demand for convenience grows, we can leverage our store footprint to reach new customer segments and expand rapid delivery capabilities without significant capital investments, which leads to our second objective, improving profitability and reducing our cost to serve.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

We're examining all aspects of our business to drive greater efficiency, including a full site by site analysis of our Kroger automated fulfillment network. Where we have seen strong demand in high density areas, these facilities deliver better results than those facilities where density is lower and customer adoption has been slower. We continue to evaluate all options across all facilities to improve profitability while continuing to provide a great customer experience. We expect to share an update on our strategic review during the third quarter. We're confident that the outcome of our work will lead to both stronger e comm capabilities and a clear path toward profitability.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Finally, we're starting the foundational work to refresh our go to market strategy. This involves a deep dive into customer data and a rigorous assessment of our competitive positioning. This important work will set us up for even stronger performance in the future. Now I'll turn it over to David, who will review our financial results in more detail. David?

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Thank you, Ron, and good morning, everyone. This quarter, Kroger delivered strong results, which reflect continued progress in our core grocery business and robust growth in e commerce and pharmacy. Momentum in our core grocery business is being driven by improved execution as well as a disciplined approach to price investments. By reducing the complexity of our promotions and investing more in everyday prices, we are sharpening our price perception with customers and driving volume improvements while responsibly managing our margins. I'll now walk through our financial results for the second quarter.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

We achieved identical sales without fuel growth of 3.4%. Our sales growth was led by strong pharmacy, e commerce and fresh results. We are encouraged by the continued improvement in grocery volumes, particularly in the perimeter of the store. Food inflation was slightly lower in the second quarter compared to the first quarter, but continues to trend in line with our original expectations from the beginning of the year. Our Pharmacy business delivered another strong quarter, driven by core Pharmacy scripts and growth in GLP-1s.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Although strong growth in pharmacy sales impacts our margin rate, it drives positive gross profit dollar growth and improves our overall operating profit. This quarter, we've been pleased to welcome more ESI customers back into our stores. We continue to expect that the full return of the business will take time. And in Q2, ESI had a roughly 15 basis point positive impact on our ID sales. We continue to keep a close watch on the changing tariff environment.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

As a domestic food retailer, we expect a smaller impact than some of our competitors. We continue to be proactive to address exposure where we do have it, and our approach remains to raise prices as a last resort to ensure that we keep prices as low as possible for our customers. Tariffs have not had a material impact on our business thus far, and as of now, do not expect them to going forward. Our FIFO gross margin rate, excluding rent, depreciation and amortization, fuel and adjustment items increased 39 basis points in the second quarter compared to the same period last year. The improvement in rate was primarily attributable to the sale of Kroger Specialty Pharmacy, lower supply chain costs and lower shrink, partially offset by the mix effect from growth in pharmacy sales, which has lower margins and price investments.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

After excluding the effect from the sale of Kroger Specialty Pharmacy, our FIFO gross margin rate decreased nine basis points, largely in line with our expectations to remain margin neutral. The slight reduction in our FIFO gross margin rate was primarily due to pharmacy mix with good progress on rate in the rest of the business. We have many levers to improve our gross margin rate over time, and we will continue to use those to balance incremental price investments that improve our value perception with customers. We expect our gross margin rate for the full year on an underlying basis to be relatively flat as we balance the impact of pharmacy mix, margin enhancement initiatives and price investments. The operating, general and administrative rate, excluding fuel and adjustment items, decreased five basis points in the second quarter compared to the same period last year.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

The decrease in rate was primarily attributable to improved productivity and a favorable comparison to prior year, which included certain nonrecurring charges, partially offset by the sale of Kroger Specialty Pharmacy. After adjusting for the effect from the sale of Kroger Specialty Pharmacy, our adjusted OG and A rate significantly improved, decreasing 41 basis points on an underlying basis. Cost optimization is one of our top priorities, and driving productivity has long been a core competency of this company. We will continue to build on that strong track record by identifying new and innovative ways to deliver cost savings across our business, and our teams are actively pursuing opportunities across multiple areas. One of the areas we're prioritizing is sourcing.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

We see significant opportunities to optimize our costs across both cost of goods sold and goods not for resale. We also have a significant and continuing opportunity to modernize work across the enterprise, making us more agile and efficient and leading to a more streamlined operating model going forward. Our adjusted FIFO operating profit in the quarter was 1,100,000,000.0 Adjusted EPS was $1.04 reflecting 12% growth compared to last year and our strongest growth rate since the 2023. Fuel is an important part of Kroger's strategy and offers an additional way to build loyalty with customers through the fuel rewards in our Kroger Plus program. Fuel sales were lower this quarter compared to last year, attributable to a decrease in the average retail price per gallon and fewer gallons sold.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Fuel profitability was also behind the same period last year, and we expect gallons sold to remain lower on a year over year basis for the remainder of 2025. Our e commerce business delivered 16% growth this quarter, driven by an increase in both household and order frequency. This growth was led by delivery with orders fulfilled from both our stores and centralized fulfillment centers. We are seeing a clear trend of customers opting for faster delivery times, an area where we are well positioned based on our conveniently located store network, coupled with our delivery partner, Instacart. Today, we can offer delivery in under two hours from 97% of our stores.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

This capability is resonating with our customers, and we continue to see more orders placed in these short windows. This digital momentum directly fuels our Retail Media business, which had a strong quarter and is a key contributor to profitability. While we're encouraged by the performance in the quarter, we believe we have an opportunity to meaningfully accelerate our growth. To support this, we're actively reviewing the operating model and how we engage with Retail Media clients to ensure we are strategically positioned to maximize growth in this area of our business. I'd like to take a moment to provide a brief update on associate and labor relations.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

We made significant progress on agreements this quarter, which provides certainty for our associates and our business. In total, we ratified new labor agreements covering approximately 54,000 associates. We continue to meaningfully improve wages and benefits, and we value our strong working relationships with our unions. By working together, we're better able to support associates and improve the experience we provide customers. These collective efforts have helped us build a more stable workforce with improved retention rates, which in turn drives a better customer experience.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

I'd now like to turn to capital allocation and financial strategy. Kroger delivered strong adjusted free cash flow this quarter, which reflects the strength of our operating performance. Free cash flow is important to our model, providing liquidity for our operations and strengthening our balance sheet. At quarter end, our net total debt to adjusted EBITDA ratio was 1.63, which is below our target ratio range of 2.3 to 2.5. This provides us with significant financial flexibility to pursue growth investments and other opportunities to enhance shareholder value.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

We expect to return to our target leverage ratio over time. Our capital allocation priorities remain consistent and are designed to deliver total shareholder return of 8% to 11% over time. We are focused on investing in projects that will maximize return on invested capital over time, while remaining committed to maintaining a current investment grade rating, growing our dividend subject to Board approval and returning excess capital to shareholders. In the second quarter, we raised our quarterly dividend by 9%, reflecting the strength of our free cash flow and our commitment to returning capital to shareholders. Our quarterly dividend has grown at a compounded annual growth rate of 13% since its reinstatement in 02/2006, and this marks the nineteenth consecutive year of dividend increases.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Dividend increases are just one component of our broader total shareholder return strategy, and we plan to continue returning capital to shareholders through share repurchases. We expect our $5,000,000,000 ASR program to be completed in the 2025. The ASR is being completed under Kroger's $7,500,000,000 share repurchase authorization. After completion of the ASR program, we expect to resume open market share repurchases under the remaining $2,500,000,000 authorization. We expect to complete these open market share repurchases by the end of the fiscal year, which is contemplated in full year guidance.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

A key priority for Kroger is to improve ROIC, which includes reallocating capital towards higher return projects such as new storing. We are pleased with the progress we are making on these projects and are on track to complete 30 this year. As Ron mentioned earlier, we plan to accelerate these storing projects beyond 2025 and expect them to be an increasing contributor to our growth, with a 30% increase expected in 2026, positioning us for sustained expansion and market share growth. I would now like to provide some additional detail on our outlook for the rest of the year. We are pleased with our second quarter results, which reflects continued momentum in our business.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Sales have been strong, led by e commerce, pharmacy and fresh, and we are encouraged by the improvement in grocery volumes. As a result, we are raising our identical sales without fuel guidance to a new range of 2.7% to 3.4. For Q3, we expect identical sales without fuel to be slightly below the midpoint of our full year range. We are also raising the lower end of our adjusted FIFO net operating profit and net earnings per diluted share guidance to new ranges of 4,800,000,000 to $4,900,000,000 and $4.7 to $4.8 respectively. I will now turn the call back to Ron.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Thanks, David. The team continues to make progress in running great stores. We are more focused on our core business and our customers. We're moving with speed and we're simplifying the company. We are executing better in our stores and we are seeing it in the results, both our quarterly financial results and our customer metrics.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Our customers are telling us they like lower prices and simpler promotions. They care about quality and value, and they appreciate better store conditions and better service. Our work is far from finished, but I'm proud of the team and the progress we're making. Before we move into Q and A, I'd like to comment briefly on the CEO search. There's no specific news to share at this time, but the Board remains actively engaged in the process. We'll now open it up for questions.

Operator

Thank you. Our first question for today comes from Leah Jordan of Goldman Sachs. Your line is now open. Please go ahead.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Morning, Leah.

Leah Jordan
Leah Jordan
VP - Equity Research at Goldman Sachs

Thank you. Good morning. Thanks for all the comments today. I mean, the biggest call out for me that was new is it seems like you plan to use your stores a bit more for e commerce fulfillment. Can you help us understand how you plan to implement that?

Leah Jordan
Leah Jordan
VP - Equity Research at Goldman Sachs

Any color on timing and cost? How much capacity do you have in your stores today? And then will you have to rework the back of the stores? And how are you thinking about labor? And I guess, ultimately, how does this balance with your CFC network today as well?

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Sure.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Let me start with that. I mean we're using our stores very heavily now to fulfill e commerce orders every day. So it's really not much of a change in that regard. We are taking a hard look at some of our automated facilities. But we had a very strong quarter in both e commerce sales as well as profitability.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Significantly, this quarter was the first time that delivery sales passed store pickup sales. So I think that indicates that delivery is really important to our customers. In terms of the strategic review, we're nearly complete. We plan to update you in the third quarter. And to be clear, we feel like e commerce is incredibly important to our customers.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

It's also important to our business. We understand that the path to profitability is also equally important. But in terms of reworking stores, there's not much that we need to do. I mean, we're doing it now. We're delivering the bulk of our e commerce is done by stores today.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

And we adjust volumes all the time. I think new store openings will help us as well. But really not a lot of work. We think it's a kind of an asset light delivery possibility and it also allows us to get deliveries to customers within a couple hours time and if they want to pay for it even earlier than that.

Leah Jordan
Leah Jordan
VP - Equity Research at Goldman Sachs

That's very helpful. Thank you. And then I wanted to switch and ask about price investments. You called out lower prices on I think 3,500 products and that's a step up from 2,000 I think you said last quarter. And I know you've changed in how you're presenting some of these promotions to be as well.

Leah Jordan
Leah Jordan
VP - Equity Research at Goldman Sachs

But just has anything changed in the competitive environment? How do you view your price gap today? Is that 3,500 the end of the line? And are you still making these investments in a margin neutral way at this point? Thank you.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Yes. Let answer that one. The competitive backdrop on pricing remains very rational out there. Our priorities currently are to really simplify our pricing strategy. We do want to lower prices.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

We have done that with the 3,500. We'll continue to do that. Any cost increases, we've tried to absorb them as much as possible. Occasionally, the tariffs will have an impact on some of our pricing. But pricing in general is very rational.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

We're going to continue to do it and we are reducing our spreads versus our competition. We did that in Q2 and I think we'll continue to do that in Q3. But when you look at pricing, we're a different model than some of our competitors. But when you look at promotional pricing, we're very, very competitive with everybody out there.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Yes, it's David. Just one more thing to add just on the margins. Obviously, this in a responsible way is an important priority for us. We feel we were able to do that in Q2, balancing investments we want to make with a range of cost saving initiatives. And I'd expect us to be able to continue to do that through the balance of the year.

Leah Jordan
Leah Jordan
VP - Equity Research at Goldman Sachs

Great. Thank you.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Thanks, Leah.

Operator

Thank you. Our next question comes from Upsh Parekh of Oppenheimer. Good

Rupesh Parikh
MD & Senior Analyst - Food, Grocery & Consumer Products at Oppenheimer & Co. Inc.

morning, and thanks for taking my question. So just going back to your ID sales momentum, now two consecutive quarters above 3%. How does your team feel about sustaining close to that level of momentum going forward?

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Rupesh, it's David. Let me take that one. I mean we're very happy with the ID sales performance that we've seen so far this year. Good growth from multiple different areas of the business. Obviously, we've updated the guidance range, which obviously we feel confident about our ability to deliver that.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

I think maybe just the one thing that is important to note is the first half of the year was definitely our easiest from a year over year comparison perspective. So as we get into the back half of the year, the comparisons do get a little harder. That's reflected, obviously, in the guidance. And if you look at the two year stacks on our ID sales for the balance of the year, we expect to deliver very healthy and continuing to improve two year stacks.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Rupesh, the only thing

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

I would add is that I think our customers are responding simpler promotions, lower prices, better service, cleaner, less cluttered stores. And to also give credit where it's due, our merchants and marketing team are offering promotions that customers are responding to and the divisions and the store associates are executing very well. So we're trying to make less busy work and more customer work.

Rupesh Parikh
MD & Senior Analyst - Food, Grocery & Consumer Products at Oppenheimer & Co. Inc.

Great. And then maybe my one follow-up question. Just on retail media, the comment here appears more positive retail media this quarter versus recent quarters. So is my understanding correct? And what do you think is driving that improved performance?

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Yes. Rupesh, I come back to the fact that we've just got a really good offering. I mean, we really like the offering that we've got here. We really think it gives the clients that use our retail media assets the ability to do things that others cannot do. And I think customers are responding to that.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

So we feel good about the growth that we're seeing. It is a little bit more positive. We did see a slight acceleration in that business this quarter relative to last quarter. And we still think this is a very meaningful opportunity for us. We are tweaking some things in the way that we talk to clients about this, which gives us confidence that this can be a continued growth driver for us both in the balance of the year and also into next.

Rupesh Parikh
MD & Senior Analyst - Food, Grocery & Consumer Products at Oppenheimer & Co. Inc.

Great. Thank you. I'll pass it on.

Operator

Thank you. Our next question comes from Simeon Gutman of Morgan Stanley. Your line is now open. Please go ahead.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Good morning, Simeon.

Simeon Gutman
Simeon Gutman
Managing Director at Morgan Stanley

Hey, good morning, Ron and David.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Good morning.

Simeon Gutman
Simeon Gutman
Managing Director at Morgan Stanley

Good morning. Hey, so if you take the first to second quarter comp, so it got a little bit better sequentially. And the slide deck said that the there was some sequential improvement in volume. I think it still implies that maybe its volume is not positive, but it improved quarter to quarter. Can you explain which one moved more?

Simeon Gutman
Simeon Gutman
Managing Director at Morgan Stanley

Was it ticket growth or volume growth sequentially? Or was it about the same to get to the 3.4?

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Here's the way I'd try and explain that one. So I think a couple of things. So we saw the kind of inflation number quarter on quarter was actually slightly more moderate in the second quarter than we'd seen in the first, and our units improved. So, I think it's pretty balanced, but it was more of a unit improvement than it was an inflation improvement.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

And just to kind of add a little color commentary there. Then the grocery units have certainly improved for the last several quarters. And at this point, we're almost flat year over year.

Simeon Gutman
Simeon Gutman
Managing Director at Morgan Stanley

Got it. Okay. And related to that, and then I'll put the follow-up. It sounds like in the back half, even though inflation does look like it's picking up a little bit, it's the comparison, which I think you've they're tougher by about 100 basis points, why the back half doesn't get even stronger. So that's the follow-up to that question.

Simeon Gutman
Simeon Gutman
Managing Director at Morgan Stanley

The other question, Ron, I wanted to ask, the not the e commerce strategic review, but it sounds like there's a lot of evaluation of everything in the business going on. I wanted to ask about the value proposition and if there is a debate around the pricing architecture and whether there is a debate around even moving to like a strict EDLP pricing architecture?

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Yes, there's no debate about moving to an EDLP pricing architecture. I mean, Kroger is a retailer that for many, many years has been a promotional retailer. Our customers respond to that. Our customers come to us for that. So I don't think there's going to be a dramatic change.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

The other hand, you look at white shelf or white tag shelf prices, and you want to narrow that spread on the everyday price items. So I don't think there's just a fundamental shift in our pricing strategy, but we're going to be sharper and we're going to be more focused and we're going to be simpler.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Yes. Let me and then let me just, Simeon, come back to the question on ID sales through the balance of the year. Listen, you rightly point out that we cycle stronger results in the second half of the year. I mean that is a big factor and definitely an important one as we reflected on both our plans for the balance of the year and, of course, where we set the guidance. We feel comfortable about where we've set the range.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

And our priority remains, as we've said, is improving grocery volumes whilst being responsible in the price investments that we're making, managing margins. And that's the delicate balancing act that we've got to continue through the balance of the year.

Simeon Gutman
Simeon Gutman
Managing Director at Morgan Stanley

Thanks. Good luck.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Thanks, Damian.

Operator

Thank you. Our next question comes from Michael Lasser of UBS. Your line is now open. Please go ahead.

Michael Lasser
Michael Lasser
Equity Research Analyst - Hardlines, Broadlines & Food Retail at UBS Group

Good morning, Michael. Good morning. Thank you so much for taking my question. With each passing day, the it does seem like you have more and more players across the industry who are looking to the core grocery sector to grab either wallet share or drive other elements of their business and use that as a funding mechanism to harvest other portions of the profit pool across retail, which could put downward pressure on the profit pool within the grocery sector. It seems like your message, Ron, is, listen, we still have a lot of room for internal improvement and repositioning our assets.

Michael Lasser
Michael Lasser
Equity Research Analyst - Hardlines, Broadlines & Food Retail at UBS Group

How much further can you drive improvement from these actions while maintaining a margin rate that's been around 3.1 for the last few years?

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Michael, I think the short answer is much further. I mean, we've got lots of opportunities to improve our margin rate. I mean, I can go through kind of a long list of those, if you would like. But certainly, we've got opportunities on pricing. We've opportunities on our brands, e commerce.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Certainly, sourcing is a big opportunity that we're working really hard on. I get what you're saying about competitors, but food industry, it's always competitive. In terms of the pricing environment out there, I think our competition continues to be very, very rational. All retailers are dealing with kind of similar issues. And our focus is simplifying and focusing on the things that matter most of our customers. I don't know, David, you want

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

to Yes. Add a just to reinforce the point about the cost opportunity that we think we have. Michael, we're saying Ron's already mentioned sourcing. I think we believe that we've got a very significant opportunity on cost of goods sold as well as on goods not for resale. We've made some people reorganizations in that area to help us really get after it.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

We think there's continued opportunity in our OG and A. And we also think what I would there is kind of big opportunities around what I would call sort of modernizing the operating model. So I think as we think about what is undeniably a very competitive environment, what we're very, very focused on is finding the fuel to help us manage that and invest back into the business. I think we feel that we've got quite a long runway on that across the coming months and years.

Michael Lasser
Michael Lasser
Equity Research Analyst - Hardlines, Broadlines & Food Retail at UBS Group

Understood. Thank you for that. My follow-up question is, can you unpack the back half guidance a little bit more? You raised the ID outlook. You lowered your tax rate.

Michael Lasser
Michael Lasser
Equity Research Analyst - Hardlines, Broadlines & Food Retail at UBS Group

You took up the low end of both your operating profit outlook and as well as your EPS outlook. So what changes from a margin or below the line perspective have you made to help us frame how we should be thinking about the second half of the year? Thank you very much.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Yes. So listen, I think on

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

IDs, we've already talked about. I think we've got much tougher comparisons as we get into the back half of the year, improving grocery volumes. So I think we feel good about where we've set the range on that. I think if I understand your question, it's more around the sort of profit puts and takes. So I think a few things that we've got going on there.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Number one, listen, it's undeniable. We still have a consumer environment that is still pretty uncertain. And whilst we have not yet seen what I would call sort of consumer sentiment translate necessarily into action, that remains an area that we continue to watch very, very carefully. I think the second thing is that our pharmacy business, we expect it to continue to grow ahead of the rates of the rest of the business. And whilst that will give us dollars, it does create pressure on mix.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

The third thing is really around fuel headwinds. We expect that obviously, it's not in our IDs, but it is in our profit number. We expect that to create a headwind for us the balance of the year as it has done so far year to date. We're working very hard, as we said, to offset all of those things with as much sort of cost and efficiency initiatives as we can. The tax rate you called out, it's very, very marginal.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

We had a couple of things really kind of move around mainly on state taxes. And candidly, it's we're talking decimal points that moved that. And so that was the reason that we felt confident enough to kind of raise the floor on the profit guidance but did not change the top end despite the improved ID sales.

Michael Lasser
Michael Lasser
Equity Research Analyst - Hardlines, Broadlines & Food Retail at UBS Group

Understood. Thank you very much and good luck.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Thanks, Michael.

Operator

Thank you. Our next question comes from Seth Sigman of Barclays. Your line is now open.

Seth Sigman
MD & Senior Equity Research Analyst at Barclays Corporate & Investment Bank

Please go ahead. Hey, good morning, everyone. Thanks for taking the I wanted to ask about e commerce and follow-up there. The growth that continues to accelerate, is there a way to think about the incrementality of what you're seeing there, thinking about new customers versus existing customers? Because you're also obviously seeing non e commerce IDs improve as well.

Seth Sigman
MD & Senior Equity Research Analyst at Barclays Corporate & Investment Bank

And then I guess a related question is just thinking about the shorter delivery windows. What are you seeing? What is the consumer looking for as they look for that quicker delivery? Thank you.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Yes, I'll start, David, feel free to add in. But the consumer is looking for kind of the things they look for when they shop our stores, but more. I mean, they want product to be fresh, they want it to be price right, they want the orders complete and they want it delivered fast. I think a few years ago, we might have said next day delivery on food items works just fine. I think today the customer is looking for speed and they're willing to pay for it.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

So I think we've tried to adjust kind of how we do business to how the consumer wants us to do business. I'm not sure if I can really say much more, but I think more and more people are willing to pay for incredibly fast service within two hours.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Yes, maybe let me take the sort of comment around incrementality. I think a couple of things here. So number one, we're adding new households. I mean that's really, really important because those new households are new households to Kroger. And we're also growing order volumes with consumers that are already shopping with us.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

And one of the things that our data tells us, and I think this is why it is really, really important, is if people enter our ecosystem through e commerce, they then shop the entire ecosystem and they become more valuable customers to us overall. So I think that gives us a good sense of there is incrementality there. Of course, you get some switching. Some people will drop out of a store and order online, but people are generally shopping multiple different ways through the Kroger ecosystem.

Seth Sigman
MD & Senior Equity Research Analyst at Barclays Corporate & Investment Bank

Okay. Thank you for that. That's helpful. And then I wanted to follow-up on the pharmacy performance in the quarter. To what extent do you think the script share gains are translating into improvements in other parts of the business, obviously, with IDs accelerating? And then how are you thinking about vaccines for the second half of the year, just given there has been a lot of noise there? Thanks so much.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Yes. So let me take that one. Listen, on vaccines, listen, I think, obviously, there's some sort of delays in the approvals. I think we'll see that normalize as we get through the sort of later into the year. So I think it's just a delay more than anything.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

So we expect that to pick up. Listen, I come back to the sort of ecosystem comment that which is that when people shop in pharmacy, when they're in the store, it does provide incrementality to the rest of the business. We don't disclose that metric, but we feel great about when somebody walks in and fulfills that prescription or whether they're doing a regular shopping trip. We're giving them the option to do those things within a Kroger store or online.

Seth Sigman
MD & Senior Equity Research Analyst at Barclays Corporate & Investment Bank

Okay. Thank you, both.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Thank you.

Operator

Thank you. Our next question comes from Paul Lejuez of Citigroup. Your line is now open. Please go ahead.

Paul Lejuez
Paul Lejuez
Managing Director at Citi

Hey, thanks. Thanks, guys. Curious if you could talk about performance by different income segments where you're seeing stronger versus weaker results. Also, if there are any callouts regionally? And then I just wanted to go back to the inflation versus unit discussion.

Paul Lejuez
Paul Lejuez
Managing Director at Citi

If you could share what your assumptions are for the second half and if you do expect units to turn positive at some point? Thanks.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Okay. Let me kind of walk through several of those here. First of all, we're seeing overall retail food spend has been very stable. I think customers probably cutting back in other areas, but spending on retail food has been kind of flattish. I think the cutting back is probably on discretionary visits discretionary purchases and restaurant visits.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

But I think at the same time, customers are feeling pretty stressed about the economy. They're doing things to save money. And when you look at the income cohorts, low and middle income households are really looking for deals. They're using coupons more. They're making smaller but more frequent trips.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

And they're buying more private label products. They're also eating out less. When you look at the higher income households, while they're also concerned about the economy and food prices, they're still spending. And they're splurging on some of the premium products. When you look at the growth in our brands, private selection and Simple Truth, where premium products are leading the way.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

They also are buying larger pack sizes. I think they're also interested in value for serving. So in both groups, we're seeing less of the maybe discretionary spending. We're seeing some declines in snack categories, adult beverages. So looking ahead, I think we think that the consumer is going to remain cautious.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Consumer sentiment continues to be low historically, and customers continue to be sensitive about food pricing. And I think in terms of regional basis, I don't know that there's really been a lot of differences across Kroger in terms of regional differences in that pattern. I think it's a kind of a bit of a tale of two cities. And in terms of inflation, our internal assumptions is 1.5% to 2.5%. And as David said, we were lower than the midpoint, I think, this past quarter. We don't expect it to be beyond our range.

Operator

Thank you. Our next question comes from Thomas Palmer of JPMorgan. Your line is now open. Please go ahead.

Tom Palmer
Tom Palmer
VP & Senior Equity Research Analyst at J.P. Morgan

Hi, and thanks for the question. Maybe to start out, I just wanted to follow-up on Leah's question on price investments. You did note FIFO gross margin, excluding fuel and specialty pharma, was down around nine basis points year over year in the quarter. How are you thinking about the trajectory of FIFO gross margin ex fuel as we look toward the second half of the year?

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Yes, let me take that one. What we've said is we're expecting for the full year that number to be relatively flat. So that should give you sufficient to be able to work out the assumption for the balance of the year. And I think, listen, what we're trying to do with that is and as I said, I think we've done a good job of that through the first half is balance, obviously, wanting to offer great prices to our consumers with obviously a whole range of multiple different margin initiatives that we've got going on. The important thing, I think, just to note, is that if you look at the second quarter and strip out kind of pharmacy the impact from pharmacy mix, our gross margins on the core business were really pretty healthy, and we feel good about where they are.

Tom Palmer
Tom Palmer
VP & Senior Equity Research Analyst at J.P. Morgan

Okay. Thanks for that. I know there's not yet a significant update on the CEO search, but I did want to ask on this. I mean, one, any, I guess, traits that you're looking for in a CEO? And then second, there seem to be a lot of different initiatives already under review absent a permanent CEO.

Tom Palmer
Tom Palmer
VP & Senior Equity Research Analyst at J.P. Morgan

Are there areas that you're holding off on reviewing or making decisions on until the seat is filled?

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Short answer to that is no. We're moving forward aggressively in virtually all areas of the business to position the company for success over the long term. In terms of what and I don't want to speak to the search committee, but there are probably no surprises here. You're looking for critical experiences in people's backgrounds. I think you're looking for competencies in terms of expertise of things they've done.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

You're looking at personal attributes around leadership and style and people skills. So there's really no surprise there. But it's a unique company and the scale is large. And that's why I think that they're being very careful and very cautious, but I remain confident they're going to find an outstanding leader for Kroger. In the meantime, I'm trying to help our talented team in any way I can.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

But no, we're going full speed ahead in virtually every area of the business to kind of position us for longer term success.

Tom Palmer
Tom Palmer
VP & Senior Equity Research Analyst at J.P. Morgan

Okay. Thank you.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Thank you.

Operator

Thank you. Our next question comes from Ed Kelly of Wells Fargo. Ed, your line is now open. Please go ahead.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Good morning, Ed.

Edward Kelly
Edward Kelly
MD - Equity Research at Wells Fargo

Yeah. Hi. Good morning, guys. Nice quarter.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Thank you.

Edward Kelly
Edward Kelly
MD - Equity Research at Wells Fargo

I guess first thing, LIFO charge higher than expected I mean, I think higher than expected this quarter given what you accrued in Q1. If you extrapolate that for the full year, it's like $0.10 a share or so. I mean, should we be thinking about LIFO as it relates to the back half of the year here?

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Yes. So we let me take that one. So as we have whilst inflation is kind of in the guidance range that we expected, it's probably more towards the midpoint of that range. And so as a result, what we did in the second quarter is we made sure that we kind of reset the accruals on LIFO on a year to date basis. So what you've got in there is two things.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

You've got to catch up from what we assumed in Q1 into Q2. And then you've got, therefore, the assumption of what I would say inflation broadly kind of where we're running extrapolated for the balance of the year. And that's why the LIFO charge went up. So I don't think that LIFO charge is reflective of that incremental charge. You'd expect to see that through the balance of the year. You'd split that in two between catch up and then ongoing.

Edward Kelly
Edward Kelly
MD - Equity Research at Wells Fargo

Okay. And then my second question is around the free cash flow guidance, which you didn't take up today, even though have $100,000,000 in EBIT. I mean, maybe slightly higher LIFO, I guess. But then the other thing is maybe some benefit from the big beautiful bill. So why isn't the free cash flow guidance higher? What's the offsets within that? Yes.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

I mean, I'd come back to sort of some of the things I've already spoken about. I obviously, we didn't raise the EPS guidance, consumer environment remaining uncertain, pharmacy mix, etcetera. And then as we have already said, we're looking to make smart investments back into the business that deliver long term value from an ROIC perspective. And so we're balancing all of those things and didn't felt therefore prudent to touch the cash flow guidance at this time.

Edward Kelly
Edward Kelly
MD - Equity Research at Wells Fargo

Okay. Thank you.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Thanks, Ed.

Operator

Thank you. Our next question comes from Julio Marquez of Guggenheim. Your line is now open. Please go ahead.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Good morning, Julio.

John Heinbockel
John Heinbockel
Senior MD & Equity Research Analyst at Guggenheim Securities

Yes. It's Jon Heimbachel.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Hey, Jon.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Hey, Heimbachel.

John Heinbockel
John Heinbockel
Senior MD & Equity Research Analyst at Guggenheim Securities

Guys. Ron, maybe first question.

John Heinbockel
John Heinbockel
Senior MD & Equity Research Analyst at Guggenheim Securities

I know sourcing, you guys see as a big opportunity. How think do about sizing that? Is that billions of dollars over time? And then what do you need to do differently? And I know you brought somebody in from the outside, do differently than you've been doing to capture that? And how quickly does that occur?

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Yes, we think sourcing is a big opportunity, not only the cog sourcing, but also the indirect sourcing. We you did reference, somebody coming in that was Ed Oldham, background at Smart and Walmart and kind of a long deep sourcing background in his history. We think the opportunity is big. I don't know that we've sized it in a way that we can share with you or the timing of that. But we do feel like we are benchmarking against other competitors, and we are trying to see if there's a bigger opportunity here than we have realized so far.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Think part of that is simplifying. I've talked to a lot of our CPG partners over the last six months. And I think our CPG partners would say, we need to reduce the cost to serve you guys and we need to have simpler promotions with you guys. And I think we're working on both of those. And CPG support has been really terrific the last several months.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

So I'm not sure I want to commit to how much and when, and I'm not even sure I should at this point. But we do think it's an enormous opportunity that we have yet to realize.

John Heinbockel
John Heinbockel
Senior MD & Equity Research Analyst at Guggenheim Securities

And then the follow-up would be, right, you think about speed of delivery. You talked about the two hours. What can you do inside the store to speed that up further, right, to where you could get to half that time? Is it how you pick the orders? I think we've talked about this.

John Heinbockel
John Heinbockel
Senior MD & Equity Research Analyst at Guggenheim Securities

Do you pick by quadrant? And remind us electronic shelf labels. Do you I don't know how broadly you've utilized those. Is that an opportunity to speed the picking process?

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Yes. I think there's a lot of things we're doing to speed things up. And we can get you your order even less than two hours, but there are probably going to be a different delivery fee associated with doing that. So it's not but most customers are very pleased and very happy with two hour delivery. I think you're right, technology is a big part of the answer.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

And whether that's AI, which we're already using to pick multiple orders at the same time, Electronic shelf tags, we are rolling out across the company. I'm not sure what percentage of our stores we have those in yet, but that is also another kind of improvement in speed. In some stores, depending on the delivery volume, you may have special picking areas. So we're looking at that as well. So there's a lot to be done, I think, in in store picking.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

And I think as part of our strategy refresh on e commerce, we'll be sharing not only what's going on inside the store, but also the last mile delivery because I think we've got some good news to share there as well.

John Heinbockel
John Heinbockel
Senior MD & Equity Research Analyst at Guggenheim Securities

Thank you, guys. Thanks, John.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Thanks, Ed.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Thanks, John.

Operator

Thank you. Our next question comes from Robert Ohmes of Bank of America. Your line is now open. Please go ahead.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Hey, Robbie.

Robert Ohmes
Robert Ohmes
Senior Research Analyst at Bank of America

Hey, Ron and David. I was hoping you guys could can you guys talk a little more, and maybe it's not that significant as it could be, but just this the non digital customers and the shift back to paper coupons and how significant can that be? Is that a new incremental driver or significant tailwind?

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Well, I think it's certainly going to help. I mean, when you think about the customers in our stores, and believe me, I've talked to hundreds and hundreds over the last six months in virtually every division where we operate. And what you heard over and over again is that older customers are not as digitally proficient as maybe younger customers. And older customers are feeling like they want the same deals that is the person with the smartphone is getting. And so we wanted to make them on an equal playing field.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

And I think the end result will get incremental business from that. I think the other customer group that we weren't responding to very well were people who don't have a $600 iPhone. And those people also were a little bit of disenfranchised with our digital coupons. So we're really trying to appeal to a broader customer segment, not only people that are very digitally savvy, but also people who are not or not able to be.

Robert Ohmes
Robert Ohmes
Senior Research Analyst at Bank of America

And does it is it pulling a lot of new customers? And I also wanted to ask on the fuel being down, is there any changes in the fuel rewards program on the digital side or anything going on there?

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Well, let me take the first piece around that. I mean the way that we're looking at that these paper coupons is, is it generating lift? And I think it is. So we're seeing unit lift from this, and it's part of the overall equation that we look to balance to make sure that we're offering great prices to customers. I think the other important thing to add on to Ron's point is this is something that we measure.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

So we're measuring customer feedback on this, and we're getting good feedback from customers, which I think is an important part of our retention strategy and recruitment strategy as we look offers to our consumer. No immediate plans to change the fuel rewards within our Kroger Plus card offerings.

Operator

Thank you. Our next question comes from Jacob Eichenfelips of Melius Research. Your line is now open. Please go ahead.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Good morning, Jacob.

Jacob Aiken-Phillips
VP - Equity Research at Melius Research LLC

Hi. Good morning, everyone. Good morning. I do wanna say that my mom appreciates the the paper coupons in in case you wanted an anecdote. But I wanted to ask about pharmacy.

Jacob Aiken-Phillips
VP - Equity Research at Melius Research LLC

So there's obviously a lot of share to gain from my closures. And then I think on like, you you said that it's incremental when they start shopping in the store. But also on the flip side, I think, like, a good portion of your current customers don't even realize that the stores have pharmacy. So can you talk a little bit about what you're doing to kinda, like, close the gap both ways to get people to shop the store more accretively?

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Yes, it's a great point. First of all, thank your mother for shopping at Kroger. We always appreciate that. In terms of pharmacy, you're right. A lot of our customers don't have an awareness that we even have a pharmacy, and we think that's a big opportunity.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

And I think what we're going to be doing going forward is, one, positioning it better in the store, but also trying to tie it into a whole HPC strategy because HPC, health and beauty products are a growing category. We think that we've kind of buried that in the store as well. So I think it's probably a merchandising shift to kind of tie in pharmacy, which has operated kind of separately in the past to tie it in with the rest of the store in a way that you know, HPC becomes a kind of a shop like its own of its own, much like, you know, the meat department or the deli bakery, etcetera, etcetera. Don't David, anything you

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

want Nothing nothing to add. I mean, I think it's an important part of the business. We've got very big opportunity tying that into the kind of overall progress ecosystem through loyalty is a big opportunity for us.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Our pharmacy team is doing a really nice job. And we think there's a big opportunity in pharmacy given the Rite Aid closures and the new ownership structure at some of our competitors. We think there's going to be an opportunity to continue to grow pharmacy better than the house.

Jacob Aiken-Phillips
VP - Equity Research at Melius Research LLC

Great. And then so you mentioned AI as like a key modernization tool. Do you have any like concrete examples of where it's driving measurable improvement or where you expect to see improvement going forward? And then I guess more generally, just like how what's the strategy for rolling out different tools or use cases?

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Yeah. Let me let me take that one. I think the way that we think about AI is it's really the natural kind of evolution of many things that we've been doing for quite some time. So obviously, we've got a couple of decades worth of unbelievable data from our loyalty program, which is an enormous data asset, which obviously is a terrific foundation for us to have. And we've also actually got a deep bench of data science capability and other capability, primarily in our eighty fourfifty one division.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

If I think about things that we've done so far, we've got a couple of good examples. I'm really just going to highlight one. We've deployed an AI tool specifically against shrink, which is an area that we've been performing well in. We can see the direct result of the AI tool that allows us to see much better inventory levels, sell through on a buy store level. And we're actually now kind of trying to transition that less or sort of away from just being a shrink tool actually into an opportunity for us to accelerate the top line as well by identifying sales opportunities primarily on seasonal items more efficiently.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

So I think we've got some good proof points, and that's a really good one. As I think about, what we do next on this, and we've got lots of things that we are experimenting with. I think, one, it's an opportunity for us to deepen customer engagement, so using it as a sales acceleration tool, and we see plenty of opportunity there. But I think there are some obviously more obvious ones around what I would call sort of operational excellence and efficiency that we have a lot of opportunity to go after and sort of links to my comments around sort of modernizing the way we work and the operating model.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

And just to throw out a couple of other examples, it's going to be really important and already is in scheduling by department by hour of the day. Planogramming is going to be very helpful to us in terms of using AI. And then finally, the whole, you know, customer personalization is is gonna be utilizing a lot of AI tools as well.

Operator

Our final question for today comes from Michael Montani of Evercore ISI. Your line is now open. Please go ahead.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Good morning, Mike.

Michael Montani
Michael Montani
Managing Director at Evercore

Yes. Hey, good morning. Thanks for taking the questions. Good wanted to ask, first off, if there's any way to kind of conceptualize the potential profit impact from the strategic review? I know we've been thinking several 100,000,000 potentially.

Michael Montani
Michael Montani
Managing Director at Evercore

But secondly, would that be included in the guide? Or is that external to that?

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Yes. You're talking about e commerce specifically?

Michael Montani
Michael Montani
Managing Director at Evercore

Yes. Yes, ecom.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Yes. Yes. I think what we will do is kind of talk in kind of general terms about our path to profitability and with the time line associated with that. But in terms of the amount, I think it's probably not a number we would disclose nor are we ready to disclose it in any case because we're still doing the review as we speak.

David Kennerley
David Kennerley
EVP & CFO at The Kroger Co

Yes. And to be clear, it is not included in the guide.

Operator

Thank you. At this time, I'll now hand back to Ron Sargent for any further remarks.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Well, thank you all for questions. We really appreciate them, particularly the comment from Jacob's mother. As you know, before we conclude our earnings call, we'd like to share a few comments with any of our associates who are listening in. I'd like to thank our associates for the strong improvement that we saw in customer equity scores. As I shared, our customers are seeing how we're improving store conditions, how we're improving and how our team is improving the shopping experience.

Ronald Sargent
Interim CEO & Chairman at The Kroger Co

Setting priorities and developing strategies is really only half the battle. I think the hard part is executing the business and that's the challenge and our teams are doing a really terrific job. So thanks everybody for joining us on the call this morning. We look forward to speaking with all of you again soon and we hope to see you in our stores.

Operator

Thank you all for joining today's call. You may now disconnect your lines.

Executives
    • Rob Quast
      Rob Quast
      VP - IR
    • David Kennerley
      David Kennerley
      EVP & CFO
Analysts
    • Ronald Sargent
      Interim CEO & Chairman at The Kroger Co
    • Leah Jordan
      VP - Equity Research at Goldman Sachs
    • Rupesh Parikh
      MD & Senior Analyst - Food, Grocery & Consumer Products at Oppenheimer & Co. Inc.
    • Simeon Gutman
      Managing Director at Morgan Stanley
    • Michael Lasser
      Equity Research Analyst - Hardlines, Broadlines & Food Retail at UBS Group
    • Seth Sigman
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    • Paul Lejuez
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    • Tom Palmer
      VP & Senior Equity Research Analyst at J.P. Morgan
    • Edward Kelly
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    • John Heinbockel
      Senior MD & Equity Research Analyst at Guggenheim Securities
    • Robert Ohmes
      Senior Research Analyst at Bank of America
    • Jacob Aiken-Phillips
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    • Michael Montani
      Managing Director at Evercore