Kroger (NYSE:KR) reported modest second-quarter identical sales growth while maintaining its full-year profit outlook, as pharmacy-related pressures, a Cyclospora outbreak and cautious consumer spending weighed on the top line.
Identical sales without fuel increased 0.2% in the second quarter. Chief Executive Officer Greg Foran said sales were tracking well before the company’s final reporting period, when the Cyclospora outbreak affected produce sales and reduced company identical sales without fuel by roughly 35 basis points.
Sales pressures prompt lower comparable-sales outlook
Chief Financial Officer David Kennerley said several factors combined to create a 265-basis-point drag on identical sales without fuel during the quarter. Those included an approximately 140-basis-point impact from the Inflation Reduction Act, a 60-basis-point effect from customers shifting from branded to generic prescriptions, a 35-basis-point impact from Cyclospora in produce, and a 30-basis-point effect from lingering egg deflation.
Foran said customers continued to visit stores and shop online, with traffic increasing slightly during the period. However, ticket declined as shoppers remained “disciplined” in their spending, affected by factors including higher fuel prices and reduced SNAP benefits.
Natural foods, meat and seafood, and bakery delivered strong results, according to Kennerley. Kroger also said it continued to outperform Circana’s “Rest of Market” benchmark of traditional grocery competitors and maintained the market-share gap it achieved in the first quarter.
The company lowered its full-year identical-sales-without-fuel outlook to a range of 0.2% to 0.8%, from previous guidance of 1% to 2%. Kennerley said the revised forecast reflects first-half results and expected pressure through the rest of the year, including lingering Cyclospora effects in the third quarter.
In the fourth quarter, Kroger expects the pharmacy-related sales impact from the Inflation Reduction Act to rise to about 150 basis points as new high-cost drugs, including GLP-1 medications, are added to formularies in January. The company also expects to cycle prior-year benefits from third-party delivery partnerships and weather-related sales in the fourth quarter.
Profit outlook maintained as margins improve
Even with the lower sales outlook, Kroger maintained its full-year adjusted FIFO operating-profit guidance of $5 billion to $5.2 billion and adjusted EPS guidance of $5.10 to $5.30.
Its FIFO gross-margin rate, excluding rent, depreciation, amortization and fuel, increased 13 basis points from the prior-year quarter. Kennerley attributed the improvement primarily to better e-commerce profitability, retail media, pharmacy mix, tariff refunds and sourcing initiatives.
Those gains were partly offset by higher shrink, transportation costs and investments in customer value. Kroger expects gross margin to remain positive for the full year, even as it anticipates some additional diesel and freight pressure in the second half.
Kennerley said tariff refunds were modest and not a meaningful driver of results because the company reinvested the proceeds in customer value. He also noted that Kroger’s exposure to tariffs is relatively limited because much of its merchandise is food sourced domestically.
The company’s operating, general and administrative expense rate rose 33 basis points year over year, reflecting investments in associate wages, higher healthcare costs and sales deleverage. Lower incentive-plan costs and productivity efforts partially offset those increases.
E-commerce, media and private brands contribute to growth
Kroger said adjusted e-commerce sales increased 20% in the quarter, marking its second consecutive quarter of profitable e-commerce growth. New e-commerce customers rose 20% from a year earlier, aided by online deal days, while delivery orders completed in less than an hour showed encouraging growth.
Retail media revenue increased 24%, its strongest growth since 2021, and media monetization rose 88 basis points. Foran said expanded advertising inventory, closer coordination between merchandising and media teams, and optimization initiatives helped improve visibility and conversion for brand partners.
The company also highlighted momentum in its private-label portfolio. Private Selection sales increased more than 14%, supported by ready-to-heat and ready-to-eat offerings. Overall, Kroger’s Our Brands sales grew faster than national brands, while penetration increased approximately 50 basis points.
Foran said Kroger is expanding its Smart Way opening-price-point brand, with plans to increase the assortment from about 130 products to 1,000 over the next year and beyond. The company also added more than 600 natural and organic items during the quarter.
Value strategy, capital plans and Giant Eagle transaction
Foran said Kroger is using cost savings from sourcing, procurement, productivity and simplification to fund its customer value plan. The multiyear effort includes strengthening shelf-price competitiveness, simplifying promotions and improving value perception across markets.
He said the company is not seeking to be the lowest-cost grocer, but aims to offer the best value through a combination of pricing, assortment, store execution, fresh products and service. Kroger plans to provide additional details on its long-term strategy at an investor update in October.
During the quarter, Kroger completed 12 major store projects, including new stores and remodels. It also repurchased about $1.2 billion of shares in the first half under its existing $2 billion authorization and expects to complete the remaining repurchases in the second half.
At quarter-end, net debt to adjusted EBITDA was 1.91, below Kroger’s target range of 2.3 to 2.5. Kennerley said the company expects over time to move back toward its target leverage range while preserving investment-grade credit metrics.
Foran reiterated that Kroger expects its planned acquisition of Giant Eagle to close in 2027, subject to the regulatory review process. He said the transaction is intended to expand the company’s ability to serve customers in additional communities.
About Kroger (NYSE:KR)
The Kroger Co (NYSE: KR) is one of the largest grocery retailers in the United States. Founded in Cincinnati in 1883 by Bernard Kroger, the company operates supermarkets, multi-department stores, pharmacies, convenience stores and fuel centers across the country.
Kroger sells a broad range of fresh foods, packaged groceries, household products, health and beauty items, prepared foods and general merchandise. Its private-label offerings include Simple Truth, Private Selection and Kroger brands.
