KR | Kroger Company (The) | earnings call 2026-09-11
Verbatim transcript (source: faster-whisper-small.en)

Number two, there is a degree of common sense that plays out here that says, you know, a customer has got options, they can turn left and they can go turn right. What sort of gap do you want on the basket between yourself and your competitors? And that takes into account many aspects, the quality of the assortment, the service, the quality of the shopping environment, quality of fresh foods. We know what that gap should be and that's what we're working towards. You don't do it all at once because you can't fund it all at once. And we've been quite deliberate about how we think about that. We generate savings through a combination of cogs, through imports for goods, not for resale, through reductions and headcount in the business because we've got more efficient at doing things. And we apply those savings to our shelf prices. And at the same time, we glide down a bit like you do when you're flying a plane to get from 40,000 feet to sea level. You take it down sort of a thousand feet at a time. You don't take too long to do it, but you don't try and do it too quickly. And you come up with a promotional mix that makes sense. And once again, through having done this for a number of years, we know what that number is. So this gets done by geography. We're well underway. We're encouraged, actually, by the results that we're getting. And what does good look like? Good looks like, you know, do we sell more units? Do we get more customers engaged in e-commerce? We track what competitors do when we do this. And it's about positioning Kroger as a really good value option out there in the marketplace. We're not in the game of being the cheapest because we don't have the lowest costs. But we can provide the best value. And all of these points are woven into our approach. And, you know, we've made good progress and you will continue to see us progress this approach. We're happy with it. And we'll share more in October. Your next question comes from the line of John Heinbuckel with Guggenheim Securities. Your line is open. Please go ahead. Greg, two related questions building on that last answer. When you think about obviously you've got to move the reality of the price gaps down. But when you think about perception, the survey work you do perception versus reality, how big do you think that gap is? How do you begin to change that? You know, is that partly a marketing issue? And then I assume you do have right. You've got some businesses where food volumes are positive. And I guess, you know, what are the commonalities there? Yeah. Hi, John. Good to talk to you again. Two very good questions. Perception versus reality. I would say to you once again, having done this before, it takes a bit of time. So initially, when you take action on your shelf prices, actually, your sales go down for the obvious reason that the item costs less. Over time, customers begin to understand what you're doing, and they start putting extra items in your basket. And then, yes, part of this is coming up with the right marketing package. And that's something that we continue to refine and work on. And you'll see some more from us in that space soon. I would say to you that over time, my experience has been that perception does equal reality. You can fool some of the customers some of the time, but you can't fool them all the time. I know anecdotally, as I get around stores and I've probably done just over 100 now, but I also know from the research that we've done in 8451 that some of our customers understand our promotional package, but well over half do not. And so once again, we've got to balance that carefully because some of the ones who do understand the package is some of our best customers. So we've got to glide path this approach sensibly and carefully. But we do understand how to do that. You know, there are some real highlights in our package in terms of what's working. I would say to you that one of the things that I really like is the excitement that we're starting to generate in the business around selling items. And, you know, when I get into a couple of categories, it might be deli and bakery, and I see that we're actually gaining market share in both dollars and units. I sort of know why that's working. And it's to do with some fantastic items that we have in that business, or the excitement that we had in the organisation when we worked out how many chickens, rotisserie chickens we sold last week between the hours of 7pm and 8pm. Actually our sales during that particular hour were up 72% on where they were previously. So it's about having great items. It's about getting our stores engaged around these particular items. Built into that is what we're doing with our brands. And as we accelerate that, I'd say that also puts a bit of pressure on the top line because you deflate your sales. Good for profit. So I'm happy with what I'm seeing around the business. This isn't going to happen in five minutes, but I'd say to you, give us a year. We'll be a lot better than what we look today. Give us another year after that, it'll even be better. I'm feeling happy with the progress after just sort of being in this business 200 days. Your next question comes from the line of Kelly Bonya with BMO Capital Markets. Your line is open, please go ahead. Hi, good morning and thanks for taking our question. Greg, just to kind of level set, you called out the incremental pharmacy headwinds quarter over quarter, which I think totals to about 30 basis points. So I guess just doing the math, the rest of the quarter over quarter deceleration in comps is about 50 basis points. And I guess you outlined the cyclospora, which is a large chunk of that. So I just want to make sure I have that math right. There's just a lot of moving pieces here. So I was hoping maybe you'd be willing to kind of just level set on what is that, what does that core grocery comp ex pharmacy? And how is that you mentioned kind of some of the fresh categories, maybe clouding the picture of market share. So can you just add a little more color on how you feel about market share and what that fresh versus non-fresh dynamic looks like? Yeah, great questions. Kelly and we'll dissect this as best we can. Don't disclose every single piece of data, but look, David and I have been chatting about this and David, I think you'll be at a place to answer this one. Yeah, okay. So Kelly, let me try and unpack this one for you. So the inflation reduction act, obviously, we'd been pretty clear that that would have an impact was 140 basis point impact to ID sales in the quarter. That was about 10 basis points worse than Q1. And in the balance of the year, we expected to get worse again, largely as a result of new drugs coming in the formulary starting in January. No profit impact to stress. We then had a brand generic. So we've seen a greater shift towards generic and away from branded that obviously hurts the sales. Again, no impact on the profit and that was about 60 basis points. Eggs, we saw it moderate, but it's still about a 30 basis point impact to ID sales. We then had on Cyclospora, a 35 basis point impact to total company IDs. Just to stress, that's really the impact from produce alone. So when you add all of those things up, that's roughly a 265 basis point headwind to the sort of comparable point versus last year. Just in terms of the market share, and then I'll hand it back to Greg for any additional comments. The point on the market share is one of the things we're really pleased about through the first half of the year and it was one of our objectives was to widen the gap to Sukarnas rest of market. So that sort of grocery competitive set and we've done that and we're really, really pleased about that. We maintained the gap that we saw in Q1, in Q2. And the point is, is we've got largely a higher fresh mix. So we were more impacted or our hypothesis, we were more impacted by Cyclospora. So our ability to hold that gap is really, really important and we're really encouraged about. And when you break it down category by category and look at our market share versus the Sukarnas rest of market, really pleased with it on a category by category basis. I think that's exactly right, David. And so far as we get into Q3, it's where we would expect to be. We're still seeing a little bit of hangover and I think that lessons and Q3 is where we want it to be. Your next question comes from the line of Leah Jordan with Goldman Sachs. Your line is open, please go ahead. Hi, good morning. Thank you for taking our question. On the fuel margin, can you talk about what's baked into the guide for the back half versus the front half? And how much of a tailwind has this been versus your initial plan for the year? And how do you think about lapping this heading in to next year? Thanks, Leah. Thanks for the questions, David here. So as I think about Q2, couple of things, we saw gallons up slightly, we outperformed the market on gallons. So we were pleased about that. If you look at CPG, so our sort of profit per gallon, we were again up slightly. When you think about total fuel profit, year over year, actually it wasn't a huge tailwind for us. It was basically kind of, I'm gonna call it low single digit profit growth on the fuel business. As we built into our guidance for the balance of the year, we are expecting and have baked into that fuel margin softer than H1. And that's what we've got in the outlook. Obviously there's a huge amount of volatility in the fuel business, which makes it difficult to call. But our expectation is softer than we're seeing in H1. Your next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open, please go ahead. Hi Greg, hey David. So Greg, we have a turnaround agenda or transformation and I'm sure you'll get more meat on it in October. The competitive and consumer backdrop feels like it's getting a little more difficult. And so at the quarter, sales weekend, but you're holding profit well. Can you help us reconcile those two things at this stage of your turnaround? How do you think about the trade off between protecting near term profits and making the investments necessary to improve the customer proposition and then obviously gain market share, thanks. Hi Simeon, good to get your question. Yeah, it is getting a little bit tighter out there. And I'd say that what we're seeing is the consumer continues to be disciplined. They're not absent. They're turning up to the stores, but they're pretty disciplined about what they buy. I actually don't mind that. I like the fact that it's getting tight and tough because I think those conditions create opportunities if you've got a good plan and you've got a great team to execute. And that team's coming together and I'm pleased with how that is looking. The other thing I'd say to you is that 200 days into the job, I actually see even more opportunities than what I thought when I started. So I don't spend any time sort of going, I'm not sure how we're going to fund this, how we're going to make it work. You know, whether it's what I'm seeing with unknown shrinkage, whether it's what I see with outer stocks, whether it's what I see with goods not for resale, whether I see cost of goods, imports, actually all of those things are actually bigger than what I thought after 30 days. And I'm really pleased with the discipline that we got in the business in terms of going after them. So it's tough. You've got to deal with the environment and the conditions that we're playing in. I actually think that's to our advantage at the moment. We're assembling a team that I think will be a world-class team of retailers. We're clear on the plan and we know how to execute it. And we did exactly that in Q2. And I'm pretty comfortable that we'll do it in Q3 and Q4. So I see the buckets of money. I know that we can get after them. And I'm feeling very good about the business. Your next question comes from the line of Tom Palmer with JP Morgan. Your line is open. Please go ahead. Good morning and thanks for the question. I did wanna dive a little bit into the gross margin that we saw in the second quarter. There were kind of four bucketed items in the press release, right? The e-com profitability, pharma sourcing and the tariff refunds. Could you maybe frame their order of importance in terms of driving that margin expansion this quarter? And then I think it would be helpful if you could maybe quantify in some form the tariff refund either in dollars or whether the magnitude swung gross margin X fuel from flatter to positive. Thanks. Hey Tom, thanks for the question. So we were pleased with FIFO gross in the quarter. We'd always communicated that our plan was to grow FIFO gross on a full year basis. And we feel good that we're gonna be able to do that through quarter three and quarter four. And I think as I reflect on kind of the model and this will be the go forward model, it's about take cost out, invest in the business but also grow margins over time. So, you know, we expect to do that through the balance of the year. And obviously we'll talk more about our multi-year plans in October. So as I think about a gross margin, I think a few things to think about. We were pleased with the e-com performance. That was a positive. Our media performance, as we said, best performance in I think five years. And then the pharmacy mix as well as good sourcing savings. So that's kind of broadly in terms of sort of order of importance. I wanna stress they were all pretty decent performance. It's not like any of these were small. On the negative, we did see some shrink downside mainly in fresh, some of that, not all of that was related to Cyclospora. So Cyclospora definitely impacted us more than we expected on the shrink side. And then the other thing, you know, obviously with increasing fuel costs, we did see a headwind relating to, you know, transportation line from fuel. Sort of similar impact to what we saw in Q1. And obviously that could be a headwind that we need to offset through the balance of the year. In terms of tariffs, we're not gonna quantify the number, but I'm gonna tell you the way we think about it. Number one, the number was pretty modest. And the way we think about that is if we get tariffs, we'll spend it. If we don't get tariffs, we won't spend it. So, you know, overall it was a neutral impact to a gross margin because we reinvested that money back. And that's gonna be the model going forward if we are to get any further refunds. Your next question comes from the line of Greg Melich with Evercore. Your line is currently opening. Please go ahead. Hi, thanks. I wanna go back, I think, and prepare comments. You said traffic was positive in the quarter. Could you help unpack that a little bit as to, you know, the sequential change in that? And then if that's the case, it seems like ticket was down. Was that, what was driving that? Was it mix, items and basket inflation? Yeah, thanks Greg, good question. Yep, we did have traffic up slightly and we're pleased with that. And ticket was down. And I think you've picked the key items here. I think the customer is pretty disciplined. You know, SNAP has an impact, GAS had an impact, less item in the basket. What I would say is that where we are running our value proposition, actually we went against that trend in terms of getting the extra items in the basket. So overall, you're correct. Yeah. Your next question. What are some of the most important characteristics that you would find and what does that suggest about progress feature growth, maybe more sort of merchandising driven than price driven? And then I wanted to ask the follow up, I don't know if I heard that, but what did you assume in the back half of the year from incremental diesel and freight costs? Thank you. Great, thanks, Christine. I'll take the first bit and David, if you can pick up diesel freight costs, et cetera. You know, what we're seeing is pretty much, if anything, has a natural organic protein health component to it, Christina, that's working extremely well. We also see where we do a great value proposition that works extremely well. So, you know, an item that we got onto just recently was a $20 sushi plate. And we do pretty well with sushi. I think we may be just about the biggest seller of sushi in America. And we do well with that. It's in a number of our stores. We then introduced an item, which is $20 sort of a family pack. I think it took about three weeks for that item to get over a million dollars. And, you know, the excitement that I see as I get around is palpable. So anything sort of that is to do with health, organic, et cetera, works. Anything that is answering a customer's question around value, what's for dinner, is working well. You know, we launched a range of private selection frozen meals that I spoke about. They've just absolutely taken off. They're exceptional quality, great value. Customers, as I said, they're not absent. They're just disciplined. And as a retailer, it's our job to be their agent. And that's exactly what we charge our merchants with doing. David. Yeah, let me just, Christina, cover the question on diesel and freight. So the important thing for us is we expect gross margin to be positive through the second half of the year. We have assumed that we will get some incremental headwinds from diesel and freight costs through the balance of the year. That's embedded in the outlook of positive FIFO gross through the balance of year and on a full year basis. Your next question comes from the line of Rupesh Parikh with Oppenheimer. Your line is open. Please go ahead. Good morning, and thanks for taking my question. So just going back to your new storage strategy in M&A, just given the giant Eagle acquisition, how should we think about balancing organic store growth versus M&A? And then second, as we are in a weaker backdrop, does that at all impact how aggressive you are in store growth? Rupesh, let me take that one. One of the things, I think we had 12 major storing projects go live this quarter, combination of new stores, major remodels, et cetera. It's gonna be a clear element of our strategy going forward, which is to open more stores. We're gonna do that both in geographies that we think are high growth, but we're also gonna do that in places where we exist already, but we feel that we have an opportunity to give consumers the opportunity to see Kroger stores and take share from competitors. So I think there's two angles to organic store growth. Sorry, organic store growth. From an M&A perspective, bit like giant Eagle, we're gonna evaluate things as they come. We're gonna be extremely disciplined about it. Greg already commented on giant Eagle. At the end of the day, this is about customers and accessing new customers in geographies where we don't play. We'll continue to look at things, but we're also gonna be extremely disciplined about capital allocation and making sure we get really good returns. Your final question comes from the line of Scott Marks with Jeffries. Your line is open, please go ahead. Hey, good morning all. Thanks very much for squeezing us in here. Wanted to come back to the topic of inflation for a second. Specifically, we've heard more recently from a number of suppliers, larger suppliers, that they intend to take pricing to offset their own inflationary input pressures and they're willing to do so at the expense of volume. In fact, they're actually assuming that they may actually see their own elasticities maybe a little bit worse than what they've been historically. So wondering if you can maybe just comment on that a little bit and help us understand what the conversations are like with suppliers and what levers you have in your toolkit as you work through these negotiations with them to try to help maintain that value for the customer. Thank you. Yeah, thanks Scott. We've got a number of things in our toolkit basically to answer that first. One of them is we've got a pretty extensive our brands program and one which resonates well with customers, whether you're talking about opening price points and you're seeing us expand our range of smart ways products there, you know, circa from about 130, we'll get that up to 1000 over the next year in a bit. Some of those are already hitting the shelves and we're very pleased with how they both look and taste and feel. Then of course we've got Kroger, we've got private selection and we've got simple truth. So this extensive portfolio where we picked up another 50 basis points of penetration or talk some more with you in October about how we see that rolling out. So customers have choices and it's up to us to provide them with that choice. Our job is to be the customer's agent and we want to be fair and open and have great relationships with all our suppliers. But at the same time, we have to also represent the consumer and if price increases are justified and make sense, then I'm happy that as a team of merchants, we sit down and we work through those. What we don't want to get in is a situation where people can just turn up and put prices up and not have full justification for that sort of increase. I'm not in the game of using inflation as a way of generating extra sales. I'm in a game of generating great comp sales, ID sales, because we represent terrific value to the customer and they trust that Kroger is their representative in creating great value. So we'll deal with that as it comes along. I would say that our relationships with suppliers is very good and very healthy. I really like the way that Mary Ellen and Mike and Carlo are managing with Ed this part of our business and I think we're in a good spot. I would want to just at this stage, thank everyone for your continued interest in Kroger and know that we really value that. And finally, on the September 11th, we pause to remember those lost and to thank first responders and service members who protect our communities every day. Thank you all for joining us. This concludes today's call. Thank you for attending. You may now disconnect.