Q3 2025 Earnings Summary
- Strong momentum in growth areas such as pharmacy, digital business, and alternative profit businesses, which gives Kroger confidence in operating profit growth in 2025.
- Kroger is opening or expanding the most number of stores in seven years, and expects to continue opening more stores, which are performing well in terms of customer connections, volumes, and early profitability.
- Mainstream customers are feeling better and increasing their engagement and spending, contributing to Kroger's positive performance, and current trends are tracking better than expected during the holiday season.
- Kroger anticipates continued margin pressure due to investments in price and wages to remain competitive, which the company acknowledges as headwinds.
- Budget-conscious customers remain under strain due to inflation and higher interest rates, affecting their spending and potentially impacting Kroger's sales.
- There is uncertainty surrounding the pending merger with Albertsons, and if it doesn't proceed, Kroger may have limited opportunities for transformational growth, affecting its future prospects.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | -1% | The slight decline was driven by lower fuel revenues and slowing food-at-home inflation, partially offset by continued digital growth and stable contributions from higher-income households. Reduced government benefits (e.g., SNAP) also constrained discretionary spending. |
Supermarket Fuel | -19% | The year-over-year drop primarily reflected a significant decrease in average retail fuel prices and a slight dip in fuel gallons sold, which was better than the broader market’s decline but still pressured total fuel revenue. |
Operating Income | -9% | This was driven by normalization of fuel profitability after exceptionally high margins in the prior year and ongoing cost pressures, including labor and supply chain costs, partially offset by cost-saving initiatives and growth in alternative profit businesses. |
Interest Expense | -8% | The decrease resulted from higher interest income on cash balances, aided by rising interest rates and lower average outstanding debt, which reduced net interest costs compared to the prior year. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Identical Sales Without Fuel | FY 2024 | 0.75% to 1.75% | 1.2% to 1.5% | raised |
Adjusted FIFO Operating Profit | FY 2024 | no prior guidance | $4.6 billion to $4.7 billion | no prior guidance |
Adjusted Net Earnings Per Diluted Share (EPS) | FY 2024 | no prior guidance | $4.35 to $4.45 | no prior guidance |
Adjusted Effective Tax Rate | FY 2024 | no prior guidance | 22.5% | no prior guidance |
Inflation | Q4 2024 | no prior guidance | ~1% | no prior guidance |
Fuel Expectations | Q4 2024 | no prior guidance | More stable year-over-year | no prior guidance |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
EPS | Q3 2025 | Slightly ahead year-over-year | 0.85 vs 0.89 in Q3 2024 | Missed |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Store expansions | Q2 2025: Accelerated store projects; more capex committed. Q1 2025: Increased store openings/remodels. Q4 2024: 30 major store projects planned. | Opened/expanded most stores in a single quarter in 7 years; expects continued tailwind. | Consistent (growing momentum) |
Digital growth and profitability | Q2 2025: Digital +11%, strong off pickup and delivery. Q1 2025: Digital +8%, delivery network nearly doubled. Q4 2024: Digital +12%, expects double-digit growth in 2024. | Digital sales +11%, delivery +18%, focus on narrowing online vs. in-store profitability gap. | Consistent (steady positive growth) |
Pharmacy performance and GLP-1 drugs | Q2 2025: Lower pharmacy margin due to GLP-1 mix. Q1 2025: High retail ring but very low margin for GLP-1, supply constraints lifted. Q4 2024: Stable pharmacy margins, GLP-1 as margin headwind. | Strong pharmacy with GLP-1 demand; product mix pressure offset by vaccine growth. | Continued volume growth, margin drag |
Fuel margins and profitability | Q2 2025: Fuel stronger YoY, but expected to be flat in 2H. Q1 2025: Margin down low single digits. Q4 2024: Slightly lower YoY at $0.49 CPG. | Lower YoY; fewer gallons sold and lower cents per gallon. | Volatile |
Guidance changes | Q2 2025: Raised capex guidance to $3.6–3.8B. Q1 2025: Reaffirmed full-year, expected pharmacy headwinds. Q4 2024: Provided 2024 outlook: ID sales +0.25–1.75%, op profit $4.6–4.8B. | Narrowed range: Operating profit $4.6–4.7B, EPS $4.35–4.45; near midpoint. | Ongoing adjustments |
Consumer behavior shifts | Q2 2025: Customers shifting to value options, at-home meals. Q1 2025: Lower-income challenges, strong mainstream/premium. Q4 2024: Improving sentiment but continued budget focus. | Mainstream households more positive; budget-conscious still under pressure; prepared-food opportunity. | Consistent (budget pressure remains) |
Competition and market share challenges | Q2 2025: Competitive environment with return to normal promotions. Q1 2025: Price investments, rising promotional activity. Q4 2024: Market share improvement expected. | Focus on customer experience, sees opportunity vs. restaurants; merger expected to help but not required. | Ongoing (strong competition) |
Our Brands | Q2 2025: ~600 new products, higher adoption among budget-conscious. Q1 2025: Positive performance, supports margin. Q4 2024: Margin contributor, 800+ new launches planned. | Outpacing national brands; mid-single-digit Private Selection growth, higher margin than national. | Continued growth |
Alternative profit businesses | Q2 2025: On track for 20%+ media growth, part of 8–11% TSR model. Q1 2025: Strong KPM results, improves margins. Q4 2024: $1.3B in op profit, $500M EBIT from these businesses. | Solid quarter; Kroger Precision Marketing a key growth driver, higher margin vs. core grocery. | Consistent (high-margin growth) |
Tariff exposure | No mention in Q2, Q1, or Q4 2024. | Minimal; <20% of Fresh is imported, even less in Center Store. | New (introduced in Q3) |
Weather events | Q2 2025: Hurricane costs impacted OG&A. No mention in Q1 or Q4 2024. | 20 bps sales lift from hurricanes/port strike, offset by higher OG&A; no major Q4 weather assumed. | Occasional factor |
Wage investments | Q2 2025: 75% wages covered by bargaining, balancing cost reductions. Q1 2025: Avg $19/hr plus benefits, improved retention. Q4 2024: 30% wage growth over 5 yrs, $19/hr average. | Continues to invest in associates and manage wage inflation via cost offsets. | Consistent (core retention strategy) |
Pending merger with Albertsons | Q2 2025: Integration work ongoing, $10.5B in new notes. Q1 2025: Expanded divestitures, $500M to lower prices, $1B to wages. Q4 2024: FTC challenges, separate state suits. | Awaiting court rulings; if rejected, no alternate big deals planned. | Ongoing (legal/regulatory process) |
Delivery and pickup profitability | Q2 2025: 2–3 yrs to improve cost-to-serve. Q1 2025: Some divisions near breakeven, no firm timeline. Q4 2024: Retaining digital customers, margin parity long-term goal. | Focus on closing gap with in-store, leveraging automation for efficiency. | Steady improvement |
Free cash flow and capital allocation | Q2 2025: Strong FCF used to delever (net debt/EBITDA ~1.24). Q1 2025: FCF enables store expansions (net debt/EBITDA ~1.25). Q4 2024: $3B FCF in 2023, investing in growth/debt reduction. | No new detail shared in Q3. | Consistent (no Q3 mention) |
Share buybacks | Q2 2025: Emphasis on organic growth over buybacks. Q1 2025: No mention. Q4 2024: Part of balanced capital return strategy. | No mention in Q3. | Less emphasis recently |
Margin expansion strategies | Q2 2025: Media growth, digital profitability, cost management. Q1 2025: Retail media, Our Brands, Fresh category. Q4 2024: Private label and supply chain optimizations. | Focus on Our Brands, shrink reduction, digital efficiency, cost-saving. | Consistent (ongoing improvements) |
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Next Year's Outlook
Q: What are the expected tailwinds and headwinds for next year?
A: Management indicated it's too early for specifics on next year's guidance, especially as they await the merger ruling with Albertsons, which will affect guidance. However, they are optimistic due to momentum in growth areas like pharmacy, digital business, and alternative profits. They don't foresee any unusual headwinds or tailwinds at this time. -
Albertsons Merger Impact
Q: How will Kroger proceed if the Albertsons merger is rejected?
A: Management stated that if the merger doesn't happen, they won't seek another transformational acquisition. They'll continue to focus on organic growth, as they don't need mergers to be successful. -
Gross Margin Outlook
Q: How do you view gross margin trends into Q4 and beyond?
A: Excluding the impact of the KSP divestiture, gross margin improved due to strong growth in Our Brands and reductions in shrink. They expect margins to be relatively flat year-over-year in Q4, excluding KSP. Improvements in warehouse and transportation costs and favorable sales mix also contribute positively. -
Inflation Expectations
Q: What's your outlook on inflation into next year?
A: Management expects inflation to remain relatively stable, possibly with a slight expansion next year. They don't anticipate any significant changes and note that vendors are being more aggressive with trade dollars, which could affect inflation over time. , -
Price Investments and CPG Trade Dollars
Q: Are you content with the level of price investments from vendors?
A: They observe that CPGs are becoming more aggressive with trade dollars. Kroger is open to partnering with vendors to drive tonnage growth. If vendors are less willing to invest, Kroger is content to promote its higher-margin Our Brands, as customers respond well to them. -
Alternative Profit Business Growth
Q: How is the alternative profit business performing?
A: The alternative profit business continues to meet growth expectations, with margins meaningfully higher than the supermarket business. Digital growth at low double digits supports both the core business and alternative profits. -
Pharmacy and Digital Sales Growth
Q: How are pharmacy and digital sales contributing to performance?
A: Management is pleased with strong results in pharmacy, particularly in vaccine growth. Digital sales grew at low double-digit rates, aligning with expectations and driving both core and alternative profit growth. , -
Consumer Sentiment and Customer Segments
Q: How are different customer segments performing?
A: Mainstream customers connected better in Q3 than in Q2; they report feeling better. Lower-income customers remain under strain due to accumulated inflation and higher interest rates, affecting them more significantly. , -
Media Growth and Alternative Revenues
Q: Is retail media growth slowing down?
A: Management expects retail media growth to be around 20% for the year, continuing to be a fast-growing part of the business. They acknowledge more advertising platforms are available but are confident due to strong returns on ad spend for CPGs partnering with Kroger. -
SG&A Leverage and Wage Investments
Q: How will SG&A leverage relate to wage inflation going forward?
A: They will continue to balance wage investments with profitability enhancements, aiming to leverage SG&A even with stable inflation and sales. They are committed to investing in wages while maintaining SG&A leverage. -
In-Store Order Selection Efficiency
Q: Can costs for in-store order selection decrease significantly?
A: Management expects to reduce costs per order by double digits over the next 2–3 years through productivity initiatives, starting with high-volume locations. They see potential to apply technology in other areas as well. -
Fresh Initiatives and RFID in Bakery
Q: What's the progress with RFID tags in the bakery?
A: They are testing RFID tags in bakery and are happy with initial results, which help associates and improve product freshness and stock levels. It's too early for budget estimates, but they are excited about the potential. -
Boost Membership Program
Q: Are you satisfied with Boost membership sign-ups and retention?
A: They are very happy with Boost membership, noting high renewal rates and high NPS scores. They are excited about its potential and aim to educate more customers about the program's value. -
GLP-1 Drug Contribution
Q: How will GLP-1 drugs impact sales next year?
A: They expect continued growth in GLP-1 prescriptions as more manufacturers enter the market and supply increases, driving further sales growth in the pharmacy segment. -
Fuel Margin Trends
Q: Can you provide color on fuel CPG contributions?
A: Fuel performance was challenging in Q3, with declines in gallons and cents per gallon. They expect fuel profitability to be more stable year-over-year in Q4, based on recent trends. -
Prepared Food Offerings
Q: How are you competing with restaurants in prepared foods?
A: Management sees a huge opportunity in prepared foods, noting that over half of meals bought at restaurants are consumed at home or in cars. They are trying different approaches and working with outside companies but are just scratching the surface. -
Tariffs Impact
Q: How might tariffs affect your business?
A: Tariff impacts on Kroger are modest since they import a small percentage of products. In fresh departments, less than 20% is imported, and even less in center store. They believe they can manage any tariff-related challenges effectively.