Q1 2025 Earnings Summary
- Delivery sales nearly doubled year-over-year, driven by broad-based customer adoption across all segments and improved technology, including acceptance of SNAP benefits.
- Tonnage trends are improving across all customer cohorts, partly due to moderating inflation and enhanced customer experience, indicating strengthening demand and positive momentum among budget-conscious consumers.
- Increasing capital investments in new stores and expansions are showing early positive results, supporting future growth and helping Kroger reach its long-term identical sales growth target of 2% to 4%.
- Ongoing pressures in pharmacy profitability are expected to continue into the second quarter, negatively impacting earnings.
- Delivery and pickup services are currently unprofitable, with no specific timeline for reaching profitability across all divisions.
- The company is operating below its optimal identical sales growth rate of 2% to 4%, with uncertainty about when it will return to this level.
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Gross Margin Outlook
Q: Can you discuss expectations for gross margins and key drivers?
A: Management reaffirmed expectations for relatively flat year-over-year gross margins, anticipating improvements beyond Q1 results due to successful margin expansion efforts. They highlighted strong performance in Our Brands, growth in Fresh categories like produce, and over 20% expected growth in retail media in the second half. Despite pharmacy headwinds carrying into Q2, they remain confident in achieving their margin expectations. -
Competitive Pricing and Promotional Intensity
Q: How is the competitive pricing landscape affecting your strategy?
A: Management feels good about their relative price position, noting that promotional activity has returned to pre-COVID levels. They continue to invest in pricing annually, aiding budget-conscious customers without compromising on quality. Vendor funding is increasing as CPG partners focus on tonnage, which supports their ability to offer competitive prices. They are executing their planned pricing strategy and see no need for reactive measures. -
Pharmacy Headwinds
Q: What are the pressures impacting pharmacy margins, and will they persist?
A: Pharmacy margins faced unexpected pressures due to product mix, particularly from high retail but low margin GLP-1 drugs and increased costs on certain medications due to regulatory restrictions. Management expects these headwinds to carry into Q2 but anticipates potential alleviation in the back half from increased vaccine volumes and normalization of supply issues. -
ID Sales Growth
Q: When can we expect identical sales to return to 2–4% growth?
A: Management expects IDs to improve throughout the year, moving towards the high end of guidance by the second half. As they cycle last year's heavy disinflation and with moderating inflation stabilizing around slightly over 1%, they anticipate returning to their long-term model of 2–4% ID sales growth. -
Delivery and Pickup Profitability
Q: When will delivery and pickup operations reach profitability?
A: Some divisions are now at breakeven or slightly profitable in these operations. While not specifying a date, management aims for these customers to be as profitable as in-store shoppers over time. Key drivers include improving the customer experience to encourage repeat orders, increasing basket sizes, and leveraging technology for operational efficiencies. -
Second Quarter Guidance
Q: What factors are influencing lower Q2 guidance?
A: The Q2 guidance reflects pharmacy headwinds and higher incentive plan accruals, especially impacting the second quarter. Despite the strong Q1 performance, it's early in the year to adjust full-year expectations significantly. Management remains on plan for Q2 relative to IDs and other metrics. -
Leverage and Capital Allocation
Q: How are you approaching leverage targets and capital allocation?
A: Management aims to maintain a leverage ratio of 2.3 to 2.5, aligning with a BBB credit rating for optimal cost of capital. Currently operating below this target, they intend to utilize this capacity for strategic initiatives like the pending Albertsons merger, while continuing to invest in growth opportunities and returning value to shareholders. -
Store Execution Improvements
Q: What are the impacts of store execution initiatives?
A: Improved store execution, such as better in-stock positions and enhanced customer experience, is driving customer count growth and broad-based improvements across customer segments. Lower turnover and investments in fresh offerings contribute to these positive trends. Management sees ongoing opportunities for further enhancement. -
Volume and Tonnage Trends
Q: How are current volume and tonnage trends shaping up?
A: Tonnage trends are improving across all customer cohorts, partly due to moderating inflation and better store execution. The company is seeing increased connection with customers, particularly among budget-conscious shoppers, supporting a positive outlook for volumes. -
Fuel Margins and Inflation Expectations
Q: Can you update us on fuel margins and inflation outlook?
A: Fuel cents per gallon margins were down low single digits in Q1. Inflation remained around slightly over 1% and is expected to stay at this level for the year, with no broad-based deflation anticipated. Commodity prices may fluctuate, but overall inflation is stabilizing.