The Kroger Co. 2027 Q2 Earnings Call

Thank you for joining us for Kroger's second quarter 2026 earnings call. I am joined today by Kroger's Chief Executive Officer, Greg Foran, and Chief Financial Officer, David Kennerley. 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. 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. I will now turn the call over to Greg.

Thank you, Rob, and good morning, everyone. This quarter reinforced my view that we are pointed in the right direction. As I reflected on our performance in the quarter, I'm pleased with our e-commerce and retail media results. I'm pleased with the growth of Our Brands, especially in health and wellness and organic. I'm pleased with the new talent we've recruited to build America's favorite grocer. I'm pleased with the improvement and value we are delivering customers and the cost savings which are funding this. Most importantly, I'm pleased with our continued progress on share. Turning to our results, sales were tracking well through the quarter until our final period, when we absorbed the impact of the Cyclospora outbreak, which cost us roughly 35 basis points of total company IDs without fuel, reflecting the impact of produce categories. Our identical sales without fuel grew 0.2% this quarter.

Customers continued to shop in our stores and online, and we saw traffic increase during the quarter. At the same time, the macro environment is challenging. We know that fuel over $4 has an impact on consumer spend. Lower drug prices in pharmacy reduced sales by approximately 140 basis points. The top line was soft across the industry this quarter. Despite these industry-wide challenges, our teams are executing our plan. Keep the customer at the center, move with more speed, be great item merchants. We are resolute and committed to executing our plan. We're chasing every dollar we can save, and you can see that in our profit result. Adjusted earnings per diluted share was $1.09. These results demonstrated the strength and flexibility of our operating model in a challenging sales environment, and I'm pleased with how our teams delivered. Our goal remains simple. We're building America's favorite grocer.

Customers want value, quality, convenience, and a shopping experience they can trust. When we deliver those things consistently, we earn bigger baskets and more trips. A lot of the work we need to do is right in front of us. We are making progress on execution across the business, but there is still work to be done, and opportunity remains inside our stores. Better in-stocks, better merchandising, better standards, better shrink management. These are not new ideas, but customers notice when we execute well. This quarter, on-shelf availability reached an all-time high, and our Pickup perfect orders were our best ever. We also have an opportunity to become stronger merchants. Whether it is fresh foods or prepared meals, we can do a better job helping customers answer, "What is for dinner?" And creating excitement around great products in our stores. When we have done that, customers have responded.

Natural and our prepared meals grew well ahead of total sales. At the same time, we have to be relentless on cost. Our teams are moving with more speed and urgency, and sourcing and savings came in ahead of plan this quarter. There is more work to do across sourcing, procurement, productivity, and simplification. Every dollar we take out is a dollar we can reinvest in areas customers will see. That is how this becomes sustainable for customers and for shareholders. Value continues to matter, and it matters more when budgets are tight. Our customer value plan is underway and progressing well. We have opportunities to strengthen our value position, simplify promotions, and make it easier for customers to recognize value in our stores. This is a multi-year effort, and we will have more to share at our investor update in October.

E-commerce is where most of the growth in our industry will come from over the next several years, and we intend to take our share of it. We have built real capability, and our stores give us a strong advantage. But customers have choices, and the bar for convenience and reliability keeps moving higher. Our objective is to grow e-commerce faster and more profitably and deliver an experience customers can count on every time. And none of this works without great people, and that is why building a strong culture remains one of my highest priorities. Simplicity and focus matter. When the work is simpler, our associates spend more time with customers. This quarter, we welcomed Emily DiMartino as our chief people officer. Emily brings deep experience leading people teams in large frontline organizations, and she is already shaping our focus on leadership and talent development.

We are also pleased to welcome Nate Faust as executive vice president and chief e-commerce officer. Nate has spent more than two decades building successful e-commerce businesses, and he brings the mix of merchandising, supply chain, and technology experience we need to accelerate our growth. We are also pleased to welcome Mark Ibbotson as executive vice president and chief store operations officer. Mark brings extensive retail and operational leadership experience, and he will help us raise the level of execution across the enterprise. We know what great looks like in our best divisions. The opportunity now is to deliver that level of performance more consistently across the organization. The work we have underway is beginning to take hold, and we are seeing early green shoots that the improvements we are making are resonating with customers. Let me give you some more context on the environment we are operating in.

Customers remained under pressure, and that has affected the industry broadly. Unit growth has slowed since the start of the year. Reductions in SNAP benefits, higher fuel prices, and softer consumer confidence are all putting pressure on household budgets. Customers are buying more on need. At the same time, we're still seeing them prioritize their health. We continue to see strong engagement in natural and organic, and we're responding by expanding the assortment across the store. During the quarter, we added more than 600 new natural and organic items, giving customers more healthy choices at great value. We're also finding new ways to make health and wellness more accessible and convenient. In August, we launched a new grocery and prescription delivery offering with Instacart, allowing customers to combine groceries and eligible prescriptions into a single order across nearly all our banners.

It's another example of how we're using the strength of our ecosystem to reduce friction and improve service. Cyclospora also affected results late in the quarter. While the categories impacted were limited, customers responded more broadly across our produce department. Our teams moved quickly, followed established protocols, and worked closely with suppliers and regulators. Food safety is our highest priority and protecting consumer trust matters. We also remain disciplined, taking unnecessary costs out while delivering greater value to customers. Those priorities go hand in hand and supported strong gross margin performance despite top-line challenges. The formula is simple, savings fund value earns a trip, and the trip is what grows this business. E-commerce had a strong quarter. During the quarter, adjusted e-commerce sales grew 20%, and combined with the continued strength of retail media, we delivered our second consecutive quarter of profitable e-commerce growth.

We're also attracting new customers, up 20% versus last year, led by strong engagement during online deal days. We have renewed our focus on in-store fulfillment and fast delivery, and we are seeing encouraging growth in delivery orders in less than an hour. Demand continues to shift towards faster fulfillment, and we're positioning our network to meet it. Retail media grew 24% during the quarter, our best since 2021, with media monetization up 88 basis points. Stronger collaboration between our merchandising and media teams, expanded advertising inventory, and optimization efforts improved visibility and conversion for our brand partners. Our Brands remain a real point of difference. With 35 plants, we control the costs and quality in a way most retailers cannot. Customers are looking for value, but they're not willing to compromise on quality. Our Brands answer both, and the momentum shows it, particularly in Private Selection and Simple Truth.

Private Selection sales increased more than 14% during the quarter, driven by strong customer response to new products, including more ready-to-heat and ready-to-eat meals. Products like our Mandarin Orange Chicken and Italian-inspired Private Selection Gnocchi Alla Sorrentina are resonating with customers and reinforce the strength of our premium, convenient meal offerings. Across the portfolio, Our Brand sales grew faster than national brands, and penetration increased approximately 50 basis points. Looking ahead, we're also expanding Smart Way, our opening price point brand, with more items, broader coverage across the store, and improved visibility both in store and online. Earlier this quarter, we expanded our loyalty program and rebranded Fuel Points as Simply Points. Customers can now use Points for savings at the pump or apply them directly to their grocery bill in store or online.

What I like about this approach is that it gives customers more flexibility to decide where the value matters most. More ways to earn, more flexibility in how customers use them. That is what a loyalty program should do. Let me also briefly touch on our planned acquisition of Giant Eagle. At its core, this is about serving more customers in more communities with the value, quality, and convenience they expect. We have a great deal of respect for the Giant Eagle team and the business they have built. Like Kroger, they have strong local relationships, trusted brands, and a long history of serving their customers. We believe this combination creates a stronger business for customers, associates, and the communities we serve. We continue to expect the transaction to close in 2027 and remain focused on working through the regulatory review process.

Stepping back, we see clear opportunities to strengthen our sales momentum, and we're going after them item by item. We controlled what we could control. We managed costs. We strengthened value for customers. We grew our e-commerce business profitably, and we delivered our profit goals in a quarter where the top line made that hard to do. I've always believed periods like this reward the operators who stay disciplined and keep doing right by the customer. That is where our focus is, and it's why I like our position going into the back half of the year. In October, we will hold our investor update. We will lay out the long-term framework, how we grow sales in store and online, how we fund the customer experience through cost savings, and what that means for the earnings power of this company. I'm looking forward to it.