Karen Short • Melius Research

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CFO Kurt Barton stated that the underlying drivers for gross margin and SG&A remain consistent with original guidance. He reiterated expectations for 20-40 bps of gross margin expansion and about 50 bps of SG&A deleverage for the year. He noted that an inflationary environment could pressure margin rates while benefiting SG&A leverage.

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CFO Kurt Barton explained that new stores provide a modest but net positive contribution to comp sales after accounting for cannibalization. He noted that as the pace of new store openings ramps from 70 to 90 per year, this contribution will increase over the next five years. Barton reiterated that new store productivity and profitability remain extremely consistent and in line with targets, performing at or above expectations.

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CEO Hal Lawton and CFO Kurt Barton responded. Lawton attributed the wide Q4 sales range to variables like weather, a shorter holiday season, and the election. Barton projected a relatively flat Q4 gross margin year-over-year as the company laps significant transportation cost benefits, with some SG&A deleverage. Lawton reiterated that returning to the long-term algorithm depends on macro conditions improving.

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CEO Mike Creedon projected a very attractive multi-year algorithm with healthy margins. CFO Stewart Glendinning added that the operating margin will structurally improve immediately post-sale due to the removal of Family Dollar's lower-margin revenue. While pressured in the short-term by corporate costs, he noted a medium-term target to reduce the corporate SG&A rate by 100 basis points, which will flow to operating margin. More details will be shared at a future Investor Day.

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CEO Michael Creedon expressed confidence in achieving an attractive multi-year margin profile. Chief Transformation Officer Stewart Glendinning added that margins will structurally improve post-sale by removing Family Dollar's lower-margin business and that the company is targeting a 100 basis point reduction in the corporate SG&A rate over the medium term. The question regarding a breakup fee was not addressed.

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CFO Kristy Chipman reiterated that a 3% comparable sales growth remains the leverage threshold beyond 2025 and that driving sales and reducing shrink are the primary opportunities for margin improvement. CEO Winnie Park specified that the SKU adjustments would affect a minority of the assortment, in the range of '10% to 15%.'

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Executive Chairman Tom Vellios expressed strong confidence in the current merchandising leadership team, noting its deep experience and the future contributions of incoming CEO Winnie Park. Interim CEO Ken Bull added that the goal is to achieve up to a 20% reduction in SKUs over time through rationalization and productivity improvements, which will create space for essential newness in the assortment.

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Interim CFO Todd Foley stated that on an 'all-in' basis, including loyalty and fuel rewards, Kroger's price gap is favorable to the 5-8% historical range mentioned. He also noted that for 2025, operating profit growth is expected to be balanced, with both 4-wall operations and alternative profits contributing in a 'reasonably similar range.'

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COO Michael Fiddelke described efficiency as an "always-on" effort embedded in the guidance, citing fulfillment and store operations as key areas. EVP Richard Gomez and EVP Cara Sylvester added examples from merchandising modernization and AI implementation. CFO James Lee addressed the yearly cadence, noting that SG&A expenses are front-loaded and that the company will lap Q3 supply chain challenges from the prior year, leading to easier profit comparisons in the second half.

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CCO Rick Gomez stated that in apparel, the focus remains on consumer trends, which currently favor a combination of newness, fashion, and value. COO Michael Fiddelke noted that Q3 ending inventory was up 3% YoY, they are well-positioned for the holidays, and the Q4 plan is to end the year 'clean.' CFO Jim Lee clarified that 2025 CapEx is expected to be between $4 billion and $5 billion, up from the ~$3 billion projected for the current year.

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EVP and CFO Richard McPhail confirmed that adjusted operating margin is the preferred metric for viewing underlying performance and that leverage dynamics are similar to GAAP. He explained that the CapEx forecast has increased from a historical 2% to 2.5% of sales to reflect leaning into high-return investments and accelerating the new store opening program.

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Retiring President Trevor Lang and CEO Tom Taylor both indicated that with the improved cost structure, better-than-expected sales would flow through very nicely. Taylor added that they would want to see sustained performance before making significant reinvestments. CFO Bryan Langley provided a key metric: at a 5% comp, the entire store and selling expense line leverages, confirming the potential for strong flow-through.

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An executive explained that the wide range reflects the ongoing volatility in the macro environment, citing the uncertainty around existing home sales. The company narrowed the range from the previous quarter but is maintaining caution. The implied Q4 comp decline of 2.5% to 6.5% is mostly driven by variability in customer transactions, with the average ticket expected to be approximately flat.

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Executive Gary Millerchip stated that while Costco has done stock splits in the past and continues to evaluate them, there is no current plan for one, noting that fractional shares make the stock accessible to employees and retail investors. On tariffs, he acknowledged they raise costs but expressed confidence in the company's ability to manage them by pulling forward inventory, working with vendors, and considering alternative sourcing. He contextualized the risk by noting that imported nonfoods represent a minority of the total business.

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Gary Millerchip, an executive, reiterated that the primary goal is driving top-line growth through member and employee investments, not targeting a specific margin. Ron Vachris, an executive, added that there are several levers to improve margin while lowering prices, such as operational efficiencies, improved sell-throughs, and better shrink results. Gary concluded that while they don't provide guidance, they believe it's possible to invest in value and still improve profitability over time, but would not commit to a specific future margin level.

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CFO Kelly Dilts stated that the investment for 'Project Elevate' is 'significantly less' than a traditional remodel. While it's early, she said the internal rate of return (IRR) is expected to be significantly higher than new store IRRs and comparable to the returns on traditional remodels.

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CFO Matt Bilunas attributed the wide operating income guidance range primarily to the potential for SG&A deleverage if sales come in at the lower end of the -3% to flat comp guidance. CEO Corie Barry addressed membership by stating that while specific metrics are not disclosed, retention rates for the paid tiers are currently outperforming the company's internal expectations, and the program continues to grow its member base.

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CFO John David Rainey stated they will continue with current segment reporting for now. Regarding OpEx, he noted Q3 was impacted by marketing and incentive pay. He explained that while they focus on efficiency, the ongoing mix shift toward digital channels, which have a higher SG&A structure than stores, creates natural pressure on the OpEx line.

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EVP and CFO Brandon Sink attributed the wide Q4 guidance to top-line uncertainty from macro pressures, weather volatility, and a shorter holiday shopping period. He declined to provide a monthly storm impact breakdown. He also confirmed that the upcoming Analyst Day will include scenario planning for 2025 and beyond.

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