Kroger Stock

Good morning, and welcome to The Kroger Company Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference call over to Rob Quast, Vice President, Investor Relations. Please go ahead.

Good morning. Thank you for joining us for Kroger's Second Quarter 2026 Earnings Call. I am joined today by Kroger's Chief Executive Officer, Greg Foran; and Chief Financial Officer, David Kennerley.

Before we begin, I want to remind you that today's discussions will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger Company assumes no obligation to update that information. After our prepared remarks, we look forward to taking your questions. [Operator Instructions]

I will now turn the call over to Greg.

Thank you, Rob, and good morning, everyone. This quarter reinforced my view that we are pointed in the right direction. As I reflected on our performance in the quarter, I'm pleased with our e-commerce and retail media results. I'm pleased with the growth of Our Brands, especially in health and wellness and organic. I'm pleased with the new talent we have recruited to build America's favorite grocer. I'm pleased with the improvement in value we are delivering customers and the cost savings which are funding this. Most importantly, I'm pleased with our continued progress on share.

Turning to our results. Sales were tracking well through the quarter until our final period when we absorbed the impact of the Cyclospora outbreak, which cost us roughly 35 basis points of total company IDs without fuel, reflecting the impact of produce categories. Our identical sales without fuel grew 0.2% this quarter. Customers continue to shop in our stores and online, and we saw traffic increase during the quarter. At the same time, the macro environment is challenging. We know that fuel over $4 has an impact on consumer spend. Lower drug prices in pharmacy reduced sales by approximately 140 basis points. The top line was soft across the industry this quarter. Despite these industry-wide challenges, our teams are executing our plan: keep the customer at the center, move with more speed, be great item merchants.

We are resolute and committed to executing our plan. We're chasing every dollar we can save, and you can see that in our profit result. Adjusted earnings per diluted share was $1.09. These results demonstrated the strength and flexibility of our operating model in a challenging sales environment, and I'm pleased with how our teams delivered. Our goal remains simple: we're building America's favorite grocer. Customers want value, quality, convenience and a shopping experience they can trust. When we deliver those things consistently, we earn bigger baskets and more trips. A lot of the work we need to do is right in front of us.

We're making progress on execution across the business, but there's still work to be done, and opportunity remains inside our stores: better in-stocks, better merchandising, better standards, better shrink management. These are not new ideas, but customers notice when we execute well. This quarter, on-shelf availability reached an all-time high, and our pickup perfect orders were our best ever. We also have an opportunity to become stronger merchants. Whether it's fresh foods or prepared meals, we can do a better job helping customers answer "What's for dinner?" and creating excitement around great products in our stores. When we've done that, customers have responded. Natural and our prepared meals grew well ahead of total sales.

At the same time, we have to be relentless on cost. Our teams are moving with more speed and urgency, and sourcing and savings came in ahead of plan this quarter. There is more work to do across sourcing, procurement, productivity and simplification. Every dollar we take out is a dollar we can reinvest in areas customers will see. That is how this becomes sustainable for customers and for shareholders. Value continues to matter, and it matters more when budgets are tight. Our customer value plan is underway and progressing well. We have opportunities to strengthen our value position, simplify promotions and make it easier for customers to recognize value in our stores. This is a multiyear effort, and we'll have more to share at our investor update in October.

E-commerce is where most of the growth in our industry will come from over the next several years, and we intend to take our share of it. We've built real capability, and our stores give us a strong advantage. Our customers have choices, and the bar for convenience and reliability keeps moving higher. Our objective is to grow e-commerce faster and more profitably and deliver an experience customers can count on every time. And none of this works without great people. And that's why building a strong culture remains one of my highest priorities.

Simplicity and focus matter. When the work is simpler, our associates spend more time with customers. This quarter, we welcomed Emilee De Martino as our Chief People Officer. Emilee brings deep experience leading people teams in large frontline organizations, and she's already shaping our focus on leadership and talent development. We're also pleased to welcome Nate Faust as Executive Vice President and Chief eCommerce Officer. Nate has spent more than 2 decades building successful e-commerce businesses, and he brings the mix of merchandising, supply chain and technology experience we need to accelerate our growth.

We're also pleased to welcome Mark Ibbotson as Executive Vice President and Chief Store Operations Officer. Mark brings extensive retail and operational leadership experience, and he will help us raise the level of execution across the enterprise. We know what great looks like in our best divisions. The opportunity now is to deliver that level of performance more consistently across the organization. The work we have underway is beginning to take hold, and we are seeing early green shoots that the improvements we are making are resonating with customers.

Let me give you some more context on the environment we are operating in. Customers remained under pressure, and that has affected the industry broadly. Unit growth has slowed since the start of the year. Reductions in SNAP benefits, higher fuel prices and softer consumer confidence are all putting pressure on household budgets. Customers are buying more on need. At the same time, we're still seeing them prioritize their health. We continue to see strong engagement in natural and organic, and we're responding by expanding the assortment across the store. During the quarter, we added more than 600 new natural and organic items, giving customers more healthy choices at great value.

We're also finding new ways to make health and wellness more accessible and convenient. In August, we launched a new grocery and prescription delivery offering with Instacart, allowing customers to combine groceries and eligible prescriptions into a single order across nearly all our banners. It's another example of how we're using the strength of our ecosystem to reduce friction and improve service. Cyclospora also affected results late in the quarter. While the categories impacted were limited, customers responded more broadly across our produce department. Our teams moved quickly, followed established protocols and worked closely with suppliers and regulators. Food safety is our highest priority, and protecting consumer trust matters.

We also remain disciplined, taking unnecessary costs out while delivering greater value to customers. Those priorities go hand-in-hand and supported strong gross margin performance despite top line challenges. The formula is simple: savings fund value, value earns a trip and the trip is what grows this business. E-commerce had a strong quarter. During the quarter, adjusted e-commerce sales grew 20%, and combined with the continued strength of retail media, we delivered our second consecutive quarter of profitable e-commerce growth. We're also attracting new customers, up 20% versus last year, led by strong engagement during Online Deal Days. We have renewed our focus on in-store fulfillment and fast delivery, and we are seeing encouraging growth in delivery orders in less than an hour. Demand continues to shift towards faster fulfillment, and we're positioning our network to meet it.

Retail media grew 24% during the quarter, our best since 2021, with media monetization up 88 basis points. Stronger collaboration between our merchandising and media teams, expanded advertising inventory, and optimization efforts improved visibility and conversion for our brand partners. Our Brands remain a real point of difference. With 35 plants, we control the costs and quality in a way most retailers cannot. Customers are looking for value, but they're not willing to compromise on quality. Our Brands answer both, and the momentum shows it, particularly in Private Selection and Simple Truth. Private Selection sales increased more than 14% during the quarter, driven by strong customer response to new products, including more ready-to-heat and ready-to-eat meals.

Products like our Mandarin Orange Chicken and Italian-inspired Gnocchi Alla Sorrentina are resonating with customers and reinforce the strength of our premium, convenient meal offerings. Across the portfolio, Our Brands sales grew faster than national brands and penetration increased approximately 50 basis points. Looking ahead, we're also expanding Smart Way, our opening price point brand, with more items, broader coverage across the store and improved visibility, both in-store and online. Earlier this quarter, we expanded our loyalty program and rebranded Fuel Points as simply Points. Customers can now use Points for savings at the pump or apply them directly to their grocery bill in-store or online. What I like about this approach is that it gives customers more flexibility to decide where the value matters most, more ways to earn, more flexibility in how customers use them. That is what a loyalty program should do.

Let me also briefly touch on our planned acquisition of Giant Eagle. At its core, this is about serving more customers in more communities with the value, quality and convenience they expect. We have a great deal of respect for the Giant Eagle team and the business they have built. Like Kroger, they have strong local relationships, trusted brands and a long history of serving their customers. We believe this combination creates a stronger business for customers, associates and the communities we serve. We continue to expect the transaction to close in 2027 and remain focused on working through the regulatory review process.

Stepping back, we see clear opportunities to strengthen our sales momentum, and we're going after them item by item. We controlled what we could control. We managed costs. We strengthened value for customers. We grew our e-commerce business profitably, and we delivered our profit goals in a quarter where the top line made that hard to do. I've always believed periods like this reward the operators who stay disciplined and keep doing it right by the customer. That is where our focus is, and it's why I like our position going into the back half of the year. In October, we will hold our investor update. We will lay out the long-term framework, how we grow sales in-store and online, how we fund the customer experience through cost savings and what that means for the earnings power of this company. I'm looking forward to it. The work is never done, and that suits us. A little better every day in a lot of places at once.

I will now turn the call over to David.

Thank you, Greg, and good morning, everyone. Greg outlined the priorities that are shaping our business, and this quarter's results reflect both the progress we are making and the areas where we see opportunity. Sales were softer than we planned, and we still delivered the profit we committed to. Gross margins improved, e-commerce profitability improved. We improved value for customers out of savings, and we managed margins responsibly. This quarter, we achieved identical sales growth without fuel of 0.2%. Let me walk through what drove that number starting with where we grew.

Natural foods, meat and seafood, and bakery all delivered strong results in the quarter. Within pharmacy, the core business was healthy. Scripts grew, and we saw continued momentum in GLP-1 medications. We continue to see impacts from the Inflation Reduction Act, which was an approximately 140 basis point headwind to identical sales without fuel, and the ongoing shift from brand to generic prescriptions reduced sales by approximately 60 basis points. Outside of pharmacy, the impact from Cyclospora Greg referenced was a 35 basis point headwind to company IDs without fuel from produce alone. And the lingering effect of egg deflation was another 30 basis point headwind. Taken together, these headwinds represented a 265 basis point drag on identical sales without fuel in the quarter.

In terms of units, grocery units decelerated slightly compared to the first quarter, driven by many of the factors Greg covered earlier. This was partially offset by overall food inflation, which was modestly higher than the first quarter. But what is important is that we continue to perform better than Circana's Rest of Market, a benchmark of traditional grocery competitors. Against this backdrop, we stayed focused on delivering value for customers, working with suppliers to optimize cost, strengthening our value proposition versus competitors and managing margins responsibly.

Our FIFO gross margin rate, excluding rent, depreciation and amortization and fuel, increased 13 basis points versus the second quarter of last year. This improvement was primarily driven by e-commerce profitability and media, pharmacy mix, tariff refunds and sourcing initiatives. These benefits were partially offset by higher shrink, increased transportation costs and investments in customer value. We continue to expect our FIFO gross margin rate to be positive on a full year basis as cost savings initiatives ramp throughout the balance of the year.

Our operating, general and administrative rate increased 33 basis points versus the second quarter of last year, driven by deliberate investments in associate wages, increased healthcare costs and sales deleverage, partially offset by lower incentive plan costs and ongoing productivity initiatives. Our adjusted FIFO operating profit in the quarter was $1.1 billion. Adjusted EPS was $1.09, representing 5% growth versus last year.

Let me also address tariffs. As we've previously discussed, our exposure is more limited than many of our competitors, reflecting the fact that the majority of what we sell is food sourced domestically. We did receive tariff refunds in the quarter, but they were not a meaningful driver of results, and they were fully reinvested back in value. While sales were soft in the quarter, earnings continue to benefit from gross profit improvement, cost savings, fuel contribution and the progress we are making in e-commerce and media.

Cost savings remain a core pillar of our long-term strategy. They are how we fund investments in customer value while protecting the long-term earnings power of the business. In the second quarter, we again delivered savings above our plan with broad-based contributions across both cost of goods sold and goods not for resale initiatives. We continue to see meaningful runway across sourcing, procurement, simplification and productivity, and we expect savings to build through the balance of the year. We look forward to sharing more specific long-term targets at our investor update in October.

Turning to fuel. Fuel remains an important contributor to our financial model. While industry fuel demand remained under pressure, our gallons increased in the quarter, outperforming the broader market by approximately 520 basis points. Gallon performance continues to be driven by our fuel rewards, which we supported with additional promotions in the quarter. Fuel redemptions increased nearly 6% versus last year. Our gallon performance, combined with higher margins per gallon in a more volatile energy market, drove modestly higher fuel profitability in the quarter.

Our associates are central to how we execute, and investing in them is directly tied to the customer experience we deliver. Competitive wages and benefits remain the foundation, and we're seeing positive results from those investments. Retail store retention continues to improve, exceeding our goal, helping us better serve our customers. That stability matters financially. Experienced associates are more productive, and we spend less on hiring and training.

Now turning to capital allocation. We continue to allocate capital towards projects that strengthen the business over the long term. During the quarter, we completed 12 major storing projects, building density in markets, expanding our ability to serve customers and supporting future growth. Kroger generated solid adjusted free cash flow this quarter, driven by our operating results. Free cash flow is important to our model, providing liquidity to our operations and allowing us to maintain a strong balance sheet.

At the end of the second quarter, Kroger's net debt to adjusted EBITDA was 1.91, compared to our net total debt to adjusted EBITDA target ratio range of 2.3 to 2.5. Over time, we expect to move back toward our target leverage ratio. We view this flexibility as a strategic asset. It gives us optionality to invest in high-return opportunities while maintaining our commitment to investment-grade credit.

Through the first half of the year, we repurchased approximately $1.2 billion of shares under our existing $2 billion authorization. Given our strong free cash flow generation and balance sheet flexibility, we remain well positioned to complete the remaining repurchases during the second half of the year. Our capital allocation framework is grounded in improving ROIC, and that discipline guides every investment decision we make. It is how we fuel our investment in growth and generate long-term returns for shareholders.

Now let me turn to our outlook. We are lowering our full year identical sales without fuel guidance to a new range of 0.2% to 0.8% from our initial range of 1% to 2%. The update reflects our first half results, together with pressures that remain in the balance of the year. In the opening weeks of the third quarter, we continue to see lingering impacts from Cyclospora. Trends are improving, but we have taken a cautious view of how long the impact may last, and our outlook assumes some headwinds to sales without fuel in the quarter.

We expect additional sales headwinds in the fourth quarter. The identical sales without fuel impact from the Inflation Reduction Act is projected to accelerate to approximately 150 basis points as new high-cost drugs, including GLP-1s, are added to the formulary in January. As is the case this year, we expect the pharmacy headwind to have no impact on profit in the fourth quarter or in 2027. Beyond pharmacy, we expect 2 headwinds related to prior year comparisons. We will begin to cycle the sales benefit from our new third-party delivery partnerships, which began last October. We also expect to cycle significant weather-related sales benefits from last year, which will weigh on identical sales, excluding fuel, in the fourth quarter. As a result, we anticipate ID sales without fuel will be slightly better in Q3 than in Q4.

Despite a lower sales outlook, we are maintaining our full year guidance for adjusted FIFO operating profit of $5 billion to $5.2 billion and adjusted net earnings per diluted share of $5.10 to $5.30. We have many levers in our financial model that provide us flexibility and allow us to deliver earnings growth despite top line pressure, and we have clear visibility into the drivers of our earnings growth ahead. Through the back half of the year, we expect consistent year-over-year earnings growth between the third and fourth quarters.

We expect cost-saving initiatives to build through the second half, along with pharmacy margin contribution, further improvement in e-commerce profitability and continued growth in our media business. And as I mentioned earlier, we resumed share repurchases this quarter following the announcement of our planned acquisition of Giant Eagle. We expect share repurchases to support earnings per share growth over the remainder of the year.

These are drivers largely within our control. We have strong plans in place, and they are the basis for our confidence in the full year outlook. The second quarter demonstrated what that discipline looks like in practice. We managed margins against a softer top line and delivered the profit we committed to. We expect to do the same through the balance of the year. Our priorities are unchanged: invest in the business for long-term growth, manage margins with discipline and generate strong free cash flow that supports attractive returns for shareholders.

And with that, we look forward to your questions.

[Operator Instructions] Your first question comes from the line of Michael Lasser with UBS.

Your clear message this morning has been that you can fund price investments almost on a one-for-one basis through the savings that you're going to realize from the business. Now with that being said, how much did you invest in price in the second quarter? Where does Kroger's price gaps stand today? Where do they need to be? And what's been the impact of those price investments, especially in light of what seems like a cautionary outlook for the back half of the year? Sorry, so many multilayered questions in there.

Yes. Michael, it's Greg. Thanks for your question, and thanks for your interest. And we, like you, have a lot of interest in making sure that our customer value plan plays out. There's a number of points you've raised. Just to reiterate, yes, we can fund it. And really, this quarter is a demonstration of that, even though we have seen that the consumer has been pretty disciplined in terms of how they've spent as they've dealt with gas and fuel and then, of course, Cyclospora.

So we're happy with that funding. We're being very measured about how we do this, measured because the value proposition actually has to get layered in with running better stores and also making sure that our e-commerce offer is hitting where we want. So we'll share some more when we get to October in terms of how we see that playing out. We're not providing exact figures on the investment, but we have invested geographically. And I've also been very pleased with how the merchants have been managing our value generally. And what I've seen over this quarter is that our pricing relative to some of our competitors on what we call our white label, our basic shelf price, has actually improved.

And then finally, the other measure that I take a lot of interest in is market share. And we spend a lot of time looking at that each week, each 4-week period. We want to open up that gap on what we call Rest of Market. We've done that gap -- we've done that. We've maintained that gap through Q2. And I think that's a pretty good performance when you consider that probably our fresh mix is more heavily weighted and we've had to deal with Cyclospora, particularly in light of the fact that, that impacted us when most of the other retailers had already completed their quarter. So I hope that answers your questions.

Dave, do you want to add anything to that?

Yes, Mike, I just think one thing to add. We were pleased with the FIFO gross margin performance this quarter. I think that demonstrates for us the ability to invest in value, offset it with savings, and that's going to be the model going forward. We're confident in the FIFO gross outlook through the balance of the year. And as we update you guys in October, that's going to be the model: generate savings, invest in value, expand the margins over time.

Your next question comes from the line of Robby Ohmes with Bank of America.

Greg, I was hoping you could talk about just inflation pressures in general or lack of them. What are you thinking could happen with the grocery industry? Obviously, with diesel prices going up a lot and things, what's the inflation outlook for you guys and your assumption for the industry for the back half of the year? And how do you see that playing out?

Yes. Thanks for your question, and it is something that weighs on my mind as I see what's happening, particularly with gas prices, diesel prices. Historically, when you get an environment like this, you see it start to flow through. We're taking a very measured approach because, as David just shared, we've got a lot of active work underway at the moment in terms of cost savings. Some of that is built around what we call our COGS. And what we want to do is make sure that the great work that's happening in that area just isn't, if you like, frittered away as we then have to deal with price increases.

So there's some really good work that the teams are doing in this area, but I would expect that the pressure is actually going to mount. And we've seen a little bit more in Q2 than what we saw in Q1. But I'm very pleased with the way the teams are managing cost and retail. And I'd reiterate again that actually our value proposition improved in Q2 vis-a-vis our competitors. And that's what I want to see. And on top of that, the more definitive value proposition that we are starting to roll out has also come into play. So there's some good managing of margins and costs in this business. And I mean what I said in the call that I'm very pleased with how the teams have managed it.

Dave, what do you want to layer in, in terms of inflation?

Yes. Thanks, Greg. A couple of things. So Robby, our outlook broadly remains the same. So our range is within this 1% to 2.5% range for the balance of the year. As Greg said, I do think we will see a bit more pressure in the second half than we've seen in the first half, but I expect us to be below CPI. Our focus, as we said, is about working with suppliers, take cost out, use that money to reinvest into value and protect margins. And so I expect the margin -- FIFO gross margins to remain positive. So we think we can manage it, but we do expect a little bit more pressure in the balance of the year.

Your next question comes from the line of Edward Kelly with Wells Fargo.

Greg, I wanted to ask you about the pricing strategy and the shift that you are looking to take here in terms of simplifying pricing and improving the value perception at the shelf. Can you just talk a little bit more about what you're looking to do there? How much of that involves less deals, better shelf price? How does it change the way that you deal with vendors around that? And then pulling something like that off, how do you think about the way customers respond, maybe customers that have become accustomed to looking for deals on like multipacks, for instance, versus just better shelf price? Just curious as to how you're thinking about all that.

Yes. Thanks, Edward. It's a great question. And as you've laid out in that question, there are many layers to this, and averages actually don't get you to the right answer. Having been at this retail game now for a number of decades, I think I'm in my fifth decade. I guess I've seen a number of these things play out. Number one, you don't do this in 5 minutes or a quarter or even a year. This is a multiyear program.

Number two, there is a degree of common sense that plays out here that says 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 in 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 1,000 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, 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 cost, but we can provide the best value. And all of these points are woven into our approach. And 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 Heinbockel with Guggenheim Securities.

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? 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, what are the commonalities there?

Yes. 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 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 84.51° 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 are 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.

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 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 organization when we worked out how many chickens, rotisserie chickens, we sold last week between the hours of 7 p.m. and 8 p.m. 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 5 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 will 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 Bania with BMO Capital Markets.

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 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?

Yes. Great questions, Kelly, and we'll dissect this as best we can. We don't disclose every single piece of data. But look, David and I have been chatting about this. And David, I think you're better placed to answer this one.

Yes. Okay. So Kelly, let me try and unpack this one for you. So the Inflation Reduction Act, obviously, we've been pretty clear that, that would have an impact, was a 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 expect it 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 brand generics. So we're seeing 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 Circana's 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, 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, we're really encouraged about. And when you break it down category by category and look at our market share versus the Circana Rest of Market, we're 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 from Cyclospora, but each week, that lessens, and Q3 is where we want it to be.

Your next question comes from the line of Leah Jordan with Goldman Sachs.

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 into next year?

Thanks, Leah. Thanks for the question. It's David here. So as I think about Q2, a 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. And 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 going to 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.

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 weakened, but you're holding profit well. Can you help us reconcile those 2 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?

Simeon, good to get your question. Yes, 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 is 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," whether it's what I'm seeing with unknown shrinkage, whether it's what I see with out of 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've 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 JPMorgan.

I did want to dive a little bit into the gross margin that we saw in the second quarter. There were kind of 4 bucketed items in the press release, right: the e-com profitability, pharma, sourcing and then 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 ex fuel from flatter to positive?

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 going to be able to do that through quarter 3 and quarter 4. 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 we expect to do that through the balance of the year. And obviously, we'll talk more about our multiyear plans in October.

So as I think about 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, 5 years and then the pharmacy mix as well as good sourcing savings. So that's kind of broadly in the -- in terms of sort of order of importance. I want to 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, obviously, with increasing fuel costs, we did see a headwind relating to -- in our 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, I'm not going to -- we're not going to quantify the number, but I'm going to 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 overall, it was a neutral impact to gross margin because we reinvested that money back, and that's going to 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.

I wanted to go back, I think in the prepared comments, you said traffic was positive in the quarter. Could you help unpack that a little bit as to 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 in basket, inflation?

Yes. Thanks, Greg. Good question. Yes, 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. 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, yes.

Your next question comes from the line of Krisztina Katai with Deutsche Bank.

Greg, a lot of the discussion today has focused on value, but some of the strongest examples that you highlighted included deli, bakery, prepared foods, I think rotisserie chicken and private brands. When you look at the categories that are gaining both dollar and unit share, what is proving most important for the customer? What are some of the most important characteristics that you would find? And how does that -- what does that suggest about Kroger's future growth algorithm, maybe more sort of merchandising driven than price driven? And then I wanted to ask a follow-up. I don't know if I heard this, but what did you assume in the back half of the year from incremental diesel and freight costs?

Great. Thanks, Krisztina. I'll take the first bit, and David, if you can pick up diesel, freight costs, et cetera. What we're seeing is pretty much, if anything has a natural, organic, protein, health component to it, Krisztina, that's working extremely well. We also see, where we do a great value proposition, that works extremely well. So an item that we got on to 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 3 weeks for that item to get over $1 million. And the excitement that I see as I get around is palpable.

So anything sort of that has 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. We launched a range of Private Selection frozen meals that I spoke about. They're 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?

Yes. Let me just, Krisztina, 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, but that's embedded in the outlook of positive FIFO gross through the balance of the year and on a full year basis.

Your next question comes from the line of Rupesh Parikh with Oppenheimer.

So just going back to your new store strategy and 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. We -- one of the things -- I think, we had 12 major storing projects go live this quarter, a combination of new stores, major remodels, et cetera. It's going to be a clear element of our strategy going forward, which is to open more stores. We're going to do that both in geographies that we think are high growth, but we're also going to 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 2 angles to organic share growth -- sorry, organic store growth.

From an M&A perspective, a bit like Giant Eagle, we're going to evaluate things as they come. We're going to 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 going to 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 Jefferies.

I 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.

Yes. 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, circa from about 130, we'll get that up to 1,000 over the next year and 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. We'll 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 11, 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.

Good morning, and welcome to the Kroger Co. First Quarter 2026 Earnings Conference Call. [Operator Instructions], Please note, this event is being recorded. I would now like to turn the conference over to Rob Quast, Vice President, Investor Relations. Please go ahead.

Good morning. Thank you for joining us for Kroger's First Quarter 2026 Earnings Call. I am joined today by Kroger's Chief Executive Officer, Greg Foran; and Chief Financial Officer, David Kennerley.

Before we begin, I want to remind you that today's discussions will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger company assumes no obligation to update that information. After our prepared remarks, we look forward to taking your questions. In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to 1 question.

I will now turn the call over to Greg.

Thank you, Rob, and good morning, everyone. I said it on day 1, and it's still true today. This is the best job in retail, full stop. I'm a believer in grocery, physical and digital. It's essential. It's resilient. People want fresh food. They want it close to home, and they want it at a price that works for them, and supermarkets done well is a fantastic business.

Now Kroger, we've got terrific assets. We're outperforming many traditional grocery competitors, and we're proud of that, but beating other grocers isn't the same as leading the industry. Customers today are shopping across all channels with more of the spend going outside of traditional grocery. But I don't see that as a problem. I see it as an opportunity, right industry, right moment, right foundation. The runway in front of this business is significant. We have what we need, now we need to execute.

Over my first 100 days, I've been in the business every week in stores, manufacturing plants, distribution centers and offices. I've spent time with associates, customers and suppliers and with many of you, and I've walked our competitors because you can't lead in this industry without understanding it from every angle. So let me give you my assessment. First, our operating costs have been growing faster than our sales. That's not sustainable. And frankly, it's not acceptable. Taking costs out of this business is not optional. It's the starting point for everything else we want to do. Second, the way we operate behind the stores needs to improve. We need to move faster, make decisions more quickly and get more out of the assets and the talent we already have. Third, our execution in stores and online needs more consistency. When we operate well, we perform well. We attract households, grow sales and deliver strong earnings. But when execution slips, we fall short of our potential. And today, the gap between our best stores and the rest of the fleet needs to improve. And closing it is one of our biggest near-term opportunities.

On top of that, we have not been opening in our stores. Competitors have continued to grow their footprint while we stepped back. Our existing footprint is 1 of our strongest assets, but standing still in store growth means standing still in market share. The good news is we have started to ramp our pipeline thoughtfully focused on the markets and formats that can generate the strongest returns. And finally, we have opportunities to strengthen our price position and make it simpler. Customers are being more deliberate with their spending and at times, shopping us selectively. We're getting too many promotional trips and not enough of the full basket.

Our ambition is clear, to be America's best grocer. We're going to lead with what we are, a great grocer focused on food, and we're going to win by doing it better than anyone else. To become America's best grocer, there are 5 things we need to get right, priorities that connect to every associate in every store every day. This is what we call The 5 Fs. Let's start with Fresh. Fresh is the single biggest reason customers choose a grocer. If the produce isn't right, if the protein disappoints, if it doesn't last at home, we've lost them. We're raising our standards and measuring freshness the way customers experience it, not just on our shelves, but in their homes. Fast, customers are busy. When we're out of stock, when the checkout is slow, when the promotion is too complicated, that costs us trips. Faster plays just as much online as it does in our stores. Quick trips in store, fast delivery at home, a perfect order on time every time. For you, we have more data and more customer insight than just about anyone in this industry. We need to use it better. Personalization, our customers actually feel and the offers they get and the experience they have in the trip itself. Friendly, our associates are one of our biggest competitive advantages, and we're going to act like it. Friendly is a hard metric. When we measure it and manage to it, it improves the customer experience. That starts with how we invest in our associates, better training, simpler tools and the support they need to do their best work. Affordable. And yes, I know it doesn't start with an F, but it belongs on the list. We have opportunities to sharpen our pricing and make value simpler for customers. Over time, our promotions have gotten too complicated and our price position has not kept pace where it needed to.

Let me be clear on what this means. We do not need to be the lowest-priced retailer. We need to be more competitive, more consistent and easier for customers to understand. When a customer is deciding where to shop, we want more of them choosing Kroger more often because the value is clear, the experience is great and the trust is there. To do this, we do not need a onetime reset. Every dollar we invest in customer value we earn through cost savings and efficiency. That's the standard we're holding ourselves to. Over time, we'll move towards simpler, more consistent everyday value. We will still be promotional, that is part of who we are, but sharper and easier for customers to understand. That requires discipline, and here's where we're pushing to fund that.

On cost of goods, we will press harder on supplier negotiations and lean further into direct sourcing. On goods not for resale, we will remove complexity and waste in addition to buying better, and we need to operate more efficiently. That means fewer organizational layers, smarter ways of working, standing up our Kroger capability center and applying AI across the business.

Let me turn to e-commerce and media, 2 businesses that are increasingly central to how we win and how we grow. Starting with e-commerce. Most of the growth in grocery today is happening online. That's where the customer is moving and that's where we have to lead. Our omnichannel customers spend nearly 2.5x more with us than our in-store-only customers. The good news is that we have the right assets to do it, a strong store footprint, deep customer data and a fresh offering that travels well into the digital basket.

Now a strong e-commerce business does something else. It powers our media business. Kroger Precision Marketing is a high-margin business built on first-party data that very few retailers can match. What sets us apart is the depth of our data. 95% of all transactions are tied to a loyalty card backed by over 20 years of history. That means we can measure actual purchase behavior, not just intent. And that's increasingly valuable to brands and advertisers. The fundamentals of this industry are moving in our direction. We operate the technology layer closest to the customer giving us a distinct advantage in how we engage and monetize those relationships. As data and direct customer relationships become the most valuable currency in advertising, those with scale and trusted customer connections will be the long-term winners. And that gives us real confidence in our ability to lead.

Over time, this will become an even more important driver of both growth and margin.

I want to spend a few moments on culture. None of this work happens without the right people moving at the right pace. Through my first 100 days, 1 thing has become clear, we need to move with more speed. We need to be more intentional and smarter about how we work at every level of this organization, and that starts with me. We are building a culture where the work is never done, where we improve the business every week.

Before I turn to the quarter, let me say a word about what you can expect from us this year. We are balancing 2 things at once, delivering results in the short term while making the changes required to improve the business long term, both matter, and we intend to do both. We will be transparent with you every step of the way on what's working, what isn't and what we're doing about it.

With that as the backdrop, let me turn to what we're seeing in the business, starting with the customer. The customer is under pressure, higher gas prices and reduced SNAP benefits and squeezing budgets, customers are managing spend carefully and shopping with real intent. That pressure is showing up in the market. Food at home growth decelerated 100 basis points compared to the last quarter. The encouraging news is that our work on affordability is starting to resonate, and you can see it in the data. Traffic is up. Customers are coming through our doors more often, which tells me our value message is starting to land. And our loyal households have now grown for 17 consecutive quarters.

We've started to pull away from the middle of the pack, both in units and in dollars, and had our best performance against Secarna's rest of market, a benchmark of traditional grocery competitors in over 3 years. That's a meaningful shift, and it tells me that the team is doing the right things in the right way.

We delivered identical sales, excluding fuel, of 1%, led by a strong performance in E-commerce, Fresh and Our Brands. 3 areas I'm spending a lot of time on. Our Brands continue to be a real strength. This quarter, Our Brands gained share and outpaced national brands by 175 basis points even with the headwinds from deflation in dairy with strong momentum in Simple Truth and Private Selection. New items like the Private Selection sparkling mineral water and our globally inspired frozen meals are resonating with customers. As a business, we're changing our mindsets to think more like item-level merchants. Customers don't buy assortment, they buy items, the garlic and herb chicken, the Black Diamond Water Melon, the Guatemalan Antigua, coffee, every item has to earn its place on the shelf and every item is an opportunity to delight a customer or lose one. That's a discipline we need to use in our brands and frankly, across the entire store.

E-commerce also performed well, growing 19%, led by delivery. We improved perfect order rates by 8% and attracted a record number of new households. And on the back of that progress, we had a milestone we've been working toward for years. Our e-commerce business, including media, turned profitable this quarter. That's a real step-up and we intend to keep building on it. What gives me confidence this is sustainable is the work behind it, particularly our shift to more store-based fulfillment, which is improving the economics of the business as we scale. Our intent is to grow this business faster than the market over time.

On costs, we are moving with urgency. We delivered savings ahead of plan this quarter, and I can tell you we're just scratching the surface. There is more to come. Margin performance was solid. We balanced productivity and savings with investments to grow. We saw some unexpected pressure in transportation from higher diesel costs that wasn't built into our original expectations for the year, but it's a manageable headwind, and we're confident we can work through it.

Stepping back, this quarter was a step in the right direction. We're making progress on the fundamentals. The strategy is coming into focus, and the team is energized about what's ahead. We're building toward a clear long-term framework we plan to share at our investor update on October 20. Between now and then, we'll keep you posted on progress.

Let me leave you with this, right industry, right moment, right foundation. The opportunity is enormous, and we know the work. First, we break clear of the pack, then we close the gap to the leaders. I'm encouraged because the work is already underway and we are seeing positive signs. But the work is never done, better every day, better every week. We have what we need, now we go execute. We will now turn the call over to David.

Thank you, Greg, and good morning, everyone. As you just heard, Greg is setting a clear strategic direction, and my job is to show you how the financial model supports it. And this quarter, it did. Kroger delivered a solid first quarter, reflecting continued progress in our core grocery business and strong growth in e-commerce. We are executing well in a dynamic environment. We are investing in price with discipline, fully funded through cost savings while maintaining a strong focus on margin performance. This quarter, we achieved identical sales growth without fuel of 1%. Sales growth was led by strong performance in e-commerce, Fresh and Our Brands. Importantly, grocery sales again represented a larger portion of our overall mix, reinforcing improving underlying trends in the core business.

Pharmacy sales were led by continued growth in GLP-1s and core scripts. That said, identical sales without fuel growth of 1% included a 130-basis-point headwind to the total company from the Inflation Reduction Act and an additional 40-basis-point headwind to the total company from the accelerating shift from brand to generic prescriptions. Despite these top line pressures, pharmacy profit grew ahead of expectations.

Food inflation came in at the low end of our expectations, down sequentially from the fourth quarter. Egg deflation was a meaningful headwind to identical sales without fuel, representing 64 basis points of pressure.

Our first quarter results reflect improving underlying volumes relative to the market, partially offset by pressure from lower inflation and pharmacy-related headwinds. Looking ahead, we expect inflationary pressure to increase as the year progresses, reflecting the broader macro environment. Against this backdrop, our priority remains clear: delivering value for customers, working with suppliers to optimize costs, narrowing price gaps versus competitors and managing our margins responsibly.

Our FIFO gross margin rate, excluding rent, depreciation and amortization, fuel and adjustment items, decreased 9 basis points in the first quarter compared to the same period last year. The change in rates was primarily driven by higher-than-expected transportation costs, the deflationary impacts from eggs and planned pricing investments. These headwinds were partially offset by favorable mix in pharmacy, improved e-commerce profitability and sourcing benefits.

Transportation was an unexpected headwind, resulting in 15 basis points of pressure in the quarter as higher oil prices impacted our fuel costs. We are managing this closely and expect some pressure to persist while oil markets remain elevated. Despite these near-term pressures, we continue to expect our FIFO gross margin rate to be positive on a full year basis with cost-saving initiatives ramping up throughout the year.

Our operating, general and administrative rate, excluding fuel and adjustment items, increased 16 basis points in the first quarter compared to the same period last year. The increase primarily reflects intentional investments in our associates, additional store hours, training and new uniforms. These pressures were partially offset by lapping higher multi-employee pension contributions from a year ago and continued progress on our ongoing productivity initiatives.

Our adjusted FIFO operating profit in the quarter was $1.5 billion. Adjusted EPS was $1.58, reflecting 6% growth compared to last year.

A core pillar of our long-term strategy is modernizing how we operate to move faster and create a more efficient cost structure that supports both margin performance and enables us to invest into more value for customers. In the first quarter, we delivered COGS savings 30% ahead of our plan. We see meaningful runway ahead across both COGS and goods not for resale, with savings expected to build throughout the balance of year and accelerate beyond. Combined with disciplined reinvestment, this positions us to drive margin expansion over time.

While we are committed to managing margins on an annual basis, quarterly results will fluctuate based on the timing of investments and savings initiatives. We look forward to sharing more specific long-term targets at our investor update this fall.

Fuel results were better than anticipated this quarter, reflecting favorable fuel margins driven by elevated volatility in global oil markets and strong volume performance relative to the industry. While our gallons were down slightly versus last year, our industry-leading fuel rewards program enabled us to outpace industry benchmarks by more than 400 basis points. During the quarter, we expanded fuel reward promotions, helping customers save at the pump in an environment where value matters more than ever, while driving incremental traffic to our stores. As a result, fuel reward redemptions were up 10% compared to last year.

As noted earlier, we delivered a strong e-commerce performance in the quarter. Growth was led by convenience orders delivered in under an hour, which represented approximately 50% of our digital growth. Our new third-party partnerships with DoorDash and Uber Eats allow us to leverage our store network, provide faster delivery and reach new customers. We gained share across every third-party platform where we operate, another proof point that we are beginning to pull away from traditional grocery.

As part of the continued evolution of our hybrid fulfillment model, we closed 3 fulfillment centers at the end of the last quarter. In markets where we have a store presence, we retained nearly all of those households and successfully converted them to store-based delivery and pickup. These actions are already translating into better profitability. Our e-commerce business, including media, became profitable this quarter ahead of schedule.

We expect profitability to accelerate through the remainder of this year and continue improving beyond 2026, and as we scale store-based fulfillment, expand media and reduce our cost to serve. Together, these levers position e-commerce to become a larger contributor to margin expansion over time.

Our e-commerce results are also creating momentum for our media business, which delivered over 20% growth this quarter. This combination of Kroger's customer data, loyalty ecosystem and expanded reach through partners is creating new opportunities for brands to engage customers in more targeted and effective ways.

Recently, we deepened several partnerships. With Google's Display and Video 360 platform, advertisers can now use KPMs retail signals to reach audiences across YouTube and YouTube TV with SKU level conversion reporting available for the first time. We're also the first retail media network set to launch a self-service collaboration with TikTok, giving brands direct access to KPM audiences within 1 of today's most influential platforms.

Looking ahead, we are expanding our AI-powered capabilities to support real-time optimization predictive budget allocation and faster audience creation, positioning AI as a key enabler of both performance and scalability. We're encouraged by the progress we are seeing in media and believe we remain in the early stages of a long-term growth opportunity.

None of the progress we are making would be possible without our associates who are at the heart of everything we do. A great customer experience begins with a motivated, engaged and well-supported team, which is why we continue to invest in our people. Beyond competitive wages and benefits this quarter, we invested in more store hours, additional training to better support our customers and new uniforms so our associates are easily recognizable on the floor, all to create a great shopping experience.

We are investing in better technology that helps our associates grow in their careers, work more efficiently and spend more time on the value-added activities our customers notice most. These investments not only strengthen the experience we deliver in our stores and online, they also improve productivity and support the long-term growth of our business.

Now turning to capital allocation and financial strategy. Kroger generated strong adjusted free cash flow this quarter, driven by our operating results. Free cash flow is important to our model, providing liquidity to our operations and allowing us to maintain a strong balance sheet. At the end of the first quarter, Kroger's net total debt to adjusted EBITDA was $1.75 million compared to our net total debt to adjusted EBITDA target ratio range of 2.3 to 2.5. Over time, we expect to move back toward our target leverage ratio. We view this flexibility as a strategic asset. It gives us optionality to invest in high-return opportunities while maintaining our commitment to investment-grade credit.

Our disciplined capital allocation continues to fuel our performance as we balance investments in growth opportunities, all while maintaining a strong financial foundation. Our capital allocation framework is grounded in a focus on improving ROIC, which is guiding every investment decision we make. We are confident that this focus will enable us to generate strong long-term returns to our shareholders.

I would now like to provide some additional detail on our outlook for the rest of the year. We are pleased with our first quarter performance, which reflects continued momentum in our core grocery business and strong performance in e-commerce. Given our outlook for the remainder of the year, we are reaffirming our full year guidance. Our confidence in the full year outlook is supported by continued progress on cost savings, improving e-commerce profitability, growth in media and disciplined reinvestment in value. For the second quarter, we expect identical sales without fuel to be roughly in line with the first quarter. This reflects continued pharmacy headwinds from the accelerating shift from brand to generic prescriptions as well as ongoing pressure on consumer spending.

We expect adjusted net earnings per diluted share to be in line with last year in the second quarter, with growth accelerating in the back half as our cost-saving initiatives continue to ramp.

In closing, we are setting a high bar for this business, and our financial model is built to support it. We are pleased with this quarter's results, and we are confident in our plans. We look forward to laying out a broader financial framework at our investor update in October.

With that, I will turn the call back to the operator to begin the question-and-answer session.

[Operator Instructions] Your first question comes from the line of John Heinbockel from Guggenheim Securities.

Execution gap between really good stores and laggards, how do you think about closing that? And how impactful would that be, right, to market share? And then lastly, do you have -- what's your thought on food volumes? And what is an acceptable food volume performance for this business?

Yes. John, it's Greg. I would say that I'm guessing over the last sort of about 15, 16 weeks, I've probably now gotten to well over 100 of our stores and many of our competitors. I would say that as a rough rule of thumb, I would say that 2 out of 5, I would find in very good condition. Another 2 out of 5 that are in moderate condition, and there's generally 1 out of 5 where we could improve the performance. So we just don't focus on that 20%, we look at actually the other 2 out of 5, where we can improve. The way you fix that is by basically getting out into the business. You spend time with the presidents in each division. You spend time with the Vice Presidents, you spend time with the district managers, you walk stores, you use the data that's available as well. We have some good data on stores. But basically, you're out there and you're seeing what's happening and you're encouraging people and making sure that we stay on top of it.

It's interesting when you come across a store that has some challenges and that's the nature of this business, and it's been like that in almost 50 years that I've been doing it, it's amazing how quickly you can get it turned around and the impact it has on sales. I was in a store the other weekend. It wasn't in great shape. It had been running negative comp sales. And in the space of basically some hard work over the day by the team, they turned it into some reasonably healthy positive comps. So it makes a difference when you run a good store.

Your comment on volumes, maybe I could just get a little bit more color on what you were after there?

Can take out pharmacy food volumes units, right? I think most conventional food retailers run negative, right? And obviously, you certainly don't want to be there.

Yes. No, we don't. And we've made comments in the script about starting to pull away from that traditional grocery set, something they call rest of market. And what we're starting to see now is the beginnings of a meaningful break, and we're nowhere near where we want to be, but there's separation. That separation has been been there now for a few months, and we're pleased with that, and we're focused on it. And at some point, we want those lines to cross and we want to get into the positive territory, but at this stage, there's a meaningful break. And I'm encouraged by that.

We refer to it as green shoots in the business.

I think the only thing I'd add, John, and agree with everything Greg said, in terms of the unit performance that we're seeing, if you look at the unit market share performance, actually it was pretty good. It was about the best we've seen in 2 to 3 years. So I think that's encouraging in the context of the market. But to Greg's point, our objective needs to be to get the units of the business to positive. And that is what we're focused on.

Your next question comes from the line of Simeon Gutman from Morgan Stanley.

When Kroger went out and did some big pricing investments, it was in the earlier part of the 2000s, a long time ago, and it took a couple of years for the sales needle to move pretty meaningfully. Can you give us a sense of the time frame? Because it sounds like you're going to do this more surgically and have it funded. So think about what's the appropriate time frame that we should expect a decent pickup in sales volumes? And if you're willing to frame, is the pricing opportunity or the value opportunity in the hundreds of millions or billions, just so we can understand how much needs to be funded over time?

Yes, Simon, good to chat again. Yes, I wasn't in the market when Kroger did it back in the 2000s, but have certainly spoken to some of the team here at Kroger that were. So I have a sense of that. And obviously, from my time at another retailer, I've got a sense of how it plays out as well. Look, we'll provide a bit more color on what we're seeing and what we're learning in October 20. At this stage, too early to comment. I don't really want to get into details around that and what's more, we're learning as we go. I appreciate this is not the same as at other retailer that I was at. So I have to understand some of the nuances that we will see around that. E-commerce has obviously changed from what it was back in 2014, 2015. So if you can just be patient with us, we'll give you some more color around October 20.

One thing to add, Simeon, I think as you guys, and obviously, as Greg said, we'll provide more color in the fall. The thing that you guys should be thinking about is we've said it. We've got a very significant cost opportunity in the business to take cost out, and it's more than enough to be able to afford the price investments we need to make.

Your next question comes from the line of Tom Palmer from JPMorgan.

Maybe -- and I appreciate there's more to come here in October, but I did want to maybe follow up on the price investments and at least understand how far along we might be at this point? I know it was cited as an item that contributed to the gross margin decline that we saw in the first quarter. Sounds like that's planned for throughout the year. So maybe just an update on kind of where we stand at this point in terms of price investments, and how you're thinking about it in terms of, I think, maybe more of a regional -- region-by-region focus versus plans to go much broader than that?

Yes. Thanks for the question, Tom. Look, we're being very thoughtful about how we do this. And just to build on David's point, we're funding it. So as we dig into what we're doing with cost of goods, when we dig into goods not for resale, as we start to expand our importing capability, we build up deposits in our bank account. And as those deposits build then we look at how we spend it. The comment around some price investment in the first quarter is, once again, we've been very thoughtful as we go through our negotiations with suppliers, as we deal with some suppliers who want to get price up, how much of that we will pass on. And I would say I'm very, very pleased with the way that the team under Mary Allen, Mike and Carlo have been managing that, managing where we want to sit with price, what we take, what we don't. And the rest of it I'll just reiterate, just be patient, we'll get to the fall, and we'll have more to share with you at that point.

Your next question comes from the line of Krisztina Katai from Deutsche Bank.

Greg, in your opening remarks and even now in some of the some of the answers to questions, obviously talked about operating costs growing faster than sales, and that's not being acceptable. Maybe can you talk about some of the areas of opportunity for the business that you see perhaps sizing up the various buckets for us? I know that there's going to be more to come on October 20. But how are you viewing the cost opportunities, especially in light of the operational and cultural improvements that you're seeking to achieve, especially at the store level?

Yes. Thanks for your question, Krisztina. There's really no shortage of opportunities as I've sort of got around the business over the last sort of 14, 15 weeks. Some of those are above the gross margin line, and they can be sitting in things like shrinkage rates sort of sitting in stores. They can be sitting in things like replenishment and how that's operating. And then some of them are sort of below the gross margin line and your traditional operational and general expenses, and it could be whether we've got the right number of people sitting in the right locations, what we're doing in terms of productivity in various parts of the business. So there is a reasonably long list of things that are going to add up over time, which will fund what we want to do.

So it's pretty wide and varied. There are literally opportunities at every single part of the business.

A couple of things to add. I mean the work is underway. So you shouldn't think about this as this is work that hasn't started. If I use our work on cost of goods sold, as an example, in Q1, we're already ahead of the expectations that we had for ourselves. So about 30% ahead of where we're at. And through the balance of this year, we expect the savings that we'll get out of the initiatives that are broad-based, as Greg said, we expect them to ramp over the course of this year, and they will endure over a multiyear period. So we think this number is significant, and that's why we feel confident we can use that as a source of improving affordability for customers.

Your next question comes from the line of Michael Lasser from UBS.

Greg, now that you've had a couple of months in the seat, it seems like your message is that Kroger can be the best version of itself without making any radical changes and [indiscernible] long-term formula of 3% to 5% earnings growth over time. Someone on the other side might say, "Hey, that might be difficult to do in an environment where your competitors are using profit pools outside of grocery to invest in driving the traffic that this sector brings." And Kroger is -- has to deal with the rigidity of its labor model at the same time that all of the growth is being driven by the grocery sector -- excuse me, by the online grocery sector. How would you respond to that? And as part of that, I don't know if you or David could note, what's going to change in the second half of the year as you're pointing to an inflection in your profitability given the updated comments that you provided around the second quarter.

Thanks, Michael. Michael, I remain incredibly encouraged by what I see as I get around the business. We've got the right format, generally in the right locations with the right size, selling the right product. People need to buy food. We've seen how important stores are in terms of e-commerce. Is e-commerce going to grow? For sure. So well run Kroger has the right assets to be able to compete with anyone out there. And because of our scale, we can also compete in retail media. And David commented in his script about the performance of that, and I'll just layer in. It's actually going really well for us. I sat down yesterday with Christine, who looks after that business, and I finished that session with her even more encouraged by the results that she's getting of late, which just continue to accelerate. So we've got the scale and we've got the assets to be able to compete. And we've got the format. There is no doubt that clubs are a powerful format and perform extremely well. But not everyone wants to go into a store that size and have to deal with pack sizes that big.

I obviously understand the supercenter business, and we even have some ourselves. A lot of people prefer to get into a 50,000, 60,000 square foot store and do their shopping and get out again. And by the way, if you're picking groceries and you're picking them in a store that size, they can also be quite efficient. So I like the fact we're in supermarkets, good article about [indiscernible] in the Financial Times today, but not everyone wants to go into store with 2,000 to 3,000 own brand SKUs. They want to be able to buy national brands. We're well positioned. We've got the assets. We've got enough scale. We can compete, whether it's in digitization and media and all those things that anyone else can. And we've got opportunity to grow. There are parts of this country where we're not operating at the moment. So I feel good about that. David, do you want to pick up the second part?

Yes, I'll take the question about H2, Michael. So I think -- listen, I just want to reiterate, I mean, we were, I think, pretty pleased with Q1, and I think particularly the share performance. So I think Q1 sort of broadly came in where we expected. Obviously, it's Q1, so it's still early in the year. So there's lots of unknowns as we head through the balance of the year. But I think a few things that, for us, give us confidence in H2, or the balance of the year and the outlook that we've got. I think the first thing is the cost initiatives ramp up. So that's going to give us fuel. What does that allow us to do? It allows us to continue sharpening value. It allows us to, as Greg talked about, focus on execution, focus on traffic. And that is building the unit momentum, continuing to accelerate our share performance.

I think the third thing is the e-comm business turned profitable in the quarter. And as that business continues to grow and accelerate, that will generate more profit performance for us, which is a really good piece of good news for us. And then the final thing is, again -- and we'll still be within the range that we communicated in inflation, and we're going to keep working very diligently with suppliers, but I think as we get through the balance of the year, we will also continue to see some increased pressure on inflation as we head through the balance of the year.

So I think we feel pretty good about how we called it. And obviously, we'll keep you guys updated as we move through the year.

Your next question comes from the line of Leah Jordan from Goldman Sachs.

I just wanted to build off of that last question. I hear on the cost savings driving a lot of the profit improvement for the year, but your updated outlook for 2Q is really suggesting the ID sales sky will be more back half weighted than maybe we thought last quarter. So just more detail around how you're thinking about inflation volumes in traffic as we move through the year? And ultimately, what I'm trying to get at is how much of that top line acceleration being driven by the macro versus your own initiatives underway like the improvements on affordability?

Yes. Leah, thanks for the question. I think a few things as we think about sort of Q2 and the year. I think as we reflect back on the plan that we built, I mean the plan was always going to be more H2 weighted. So I think that was the plan that we build for ourselves. And as you know, we don't guide to specific quarters. And what I'd say is things are playing out broadly as we expected with the exception of the fuel inflation that Greg touched on in his script.

I think as we head into Q2, I think a few things to think about. So the first is, we are expecting FIFO gross margins to be better. So we've got a number of things that egg inflation -- or egg deflation a very meaningful one, that will improve as we get into Q2. We are expecting our OG&A investments to be a little bit higher as we go through the year. Those are deliberate investments in the same things we've been talking about, back to Greg talking about well-run stores, you need engaged associates, well trained, right number of them in the store, right number of hours. So we're making deliberate choices about that.

I think the other thing about Q2 is whilst none of them are individually material enough to call out, collectively, we are lapping a collection of sort of what I would call onetime items that caused some headwinds for Q2 specifically. And that's why you get the difference between what will ultimately be our H1 numbers and H2.

And to build on the point, as I said to Michael's question, listen, the cost savings ramp up, gives us more fuel to invest into the business, a little bit of inflationary pressure or still within the range as we move through the balance of the year, and an e-com business and a media business that will continue to accelerate.

Your next question comes from the line of Edward Kelly from Wells Fargo.

Greg, I wanted to ask you, you've mentioned the desire to move fast. I think last quarter, you said something about behind competition, but you want to catch up and then pass. And the strategy as it pertains to investing in price and funding it with cost saves, we have heard others talk about that as well. I think almost every company we cover this quarter has talked about investing in price. My question is, how are you weighing the speed at which you want to move? So meaning slowly stepping on the accelerator and hoping the competition doesn't see you coming versus flooring it and really closing the gap and the success of each of those sort of initiatives? I'm just kind of curious as to how you weigh the pace at which you're moving. And then maybe you could weave in, I know you're doing some price tests currently, what you're seeing in those price test, and how that might inform how this process sort of moves forward?

Yes. Thanks, Edward. As I said in the script, it's really about threading the needle, isn't it? You have to be pretty thoughtful here that what you're doing is you're balancing the short term with the longer term. And the other component that comes into play is the capability of the team to be able to execute. If you're going to start moving on price, you need to make sure that your stores are in good shape. So there are other things that have to come into play at the same time that you start to think about, "Well, gee, maybe I need to get a little bit more affordable on price."

If I can just tease out the price comment piece, the objective of Kroger, and if you go back to the 2000s, and I think it might have been Simeon or one of the others who raised it last time this was done in a meaningful way, I think. The objective actually is not to get down and be the same price as if you like, some of the discounters in the marketplace. The objective here is to get to a situation where customers feel comfortable that the price that they're getting when they shop in a Kroger store or a Kroger brand is actually fair and reasonable. And if you have a look at sort of what's been happening in the rest of market, what's happened is those price gaps have widened over several years. And that's, I'm sure, one of the reasons why the share starts to move from rest of market to the other end of the market that's called [indiscernible].

So our objective here is not to go and price ourselves at a discount price, it's to actually get to a situation where the customer says, "You know what, I have a choice of turning right or left when I leave my house, or I can swipe left or swipe right on my phone." And we want them to go, we're going to swipe to Kroger or we're going to drive to Kroger because it's a terrific grocery store. It's got a great range of fresh food. It's got a great range of brands, national brands and our brands. It's affordable. Or if I'm going to go online, it's got everything that I want in my basket. If I need to get it in 30 minutes, I can do that. If I need to get it same day, I can do that, and it's got some uniqueness about it in terms that they do fresh really well, they do convenience meals really well, and they've got a terrific selection of Own Brands.

So that's the position that we want to take. And we do that very carefully, surgically almost by threading this needle. I am very, very conscious as is David that what we're doing here is going to be hard. We're not taking any dramatic drastic actions. We're being very surgical, very thoughtful I guess I've had the benefit of doing this before. Let's wait and see what happens from a competitive perspective. I can't judge that at this point. we'll know more, and we'll share more when we get to October '20. But it's sort of how I'm thinking about it. Anything you want to add to that, David?

No. Maybe I don't know whether the price test were running this. And as you'd expect, we're running price tests.

And we're not going to divulge the details of that at this point in time for obvious reasons. But we'll share a bit more when we get to October '20.

Your next question comes from the line of Seth Sigman from Barclays.

As you think about the guidance for this year, it sounds like the investments are going to ramp, but the savings are also going to ramp. And previously, you had targeted that $400 million of savings from e-commerce. Is there a bigger, maybe more inclusive number for savings that's built into this guidance now that you can quantify to give investors some confidence in your ability to drive all of that change?

Yes. Seth, let me take that one. I mean we obviously communicated last year when we closed the Ocado sheds included in our guidance, the $400 million improvement in e-commerce. And what I'd say is that e-commerce profitability, which includes, obviously, that $400 million improvement is ahead of schedule and accelerating faster than we thought. So I think that is an additional tailwind. We -- whilst I'm not going to put a number on it, we will share more in the fall about what we think the multiyear opportunity is. The cost savings that we plan to realize through the balance of the year are more than sufficient for us to make the investments that we talked about. So I talked about OG&A likely to be an area of continued investment as we head through the year, offset with improvements in gross margin.

So in summary to your question, the savings are bigger than the investments, and that's what gives us confidence in our ability to deliver the profit number for the year.

Your next question comes from the line of Rupesh Parikh.

So on the pharmacy business, I was curious how you're thinking about the headwind related to the Inflation Reduction Act and branded generic for the balance of the year? And I also want to see if you can provide any color on quarter-to-date trends?

Yes, let me take that one initially, Rupesh, and then I'll ask Greg to add any additional color. Lots of changes in the pharmacy space this year. We obviously knew about the Inflation Reduction Act coming into the year. We estimated that to be about a 130-basis-point headwind for the year. And honestly, it's playing out exactly as we expected. Obviously, that's a headwind to sales. But given the way the rebates work, it's neutral from a profit perspective.

What we're also seeing, and it's an industry thing, is a sort of shift from branded drugs to generics, impacted us by about 40 basis points on the total quarter on total ID sales. On that one, even though it's a headwind to sales, it's actually profit positive. So it helps improve the margin profile of the business, and again, hence, why the sales headwind doesn't impact our profit guidance.

I think despite these pressures, honestly, the pharmacy business continues to do well. If you look at core scripts, GLP-1 performance, we're winning share. And that's really the sort of yardstick that we use to measure the performance of the business as well as the financial ones. And I think as you think about something like GLP-1s, that consumer who comes and fills their prescription in the store, not only are they filling their prescription, but they're also changing their eating habits. They want more fresh, higher protein, they're shopping better [indiscernible] categories. So I think we feel that the overall Kroger ecosystem is very well positioned to serve those customers. So I think, yes, some headwinds on the top line for the pharmacy business, the industry facing much of the same. We're winning share. I feel good about how we're doing.

I think that's exactly right, David. I think a little bit like we're seeing in the rest of the business, there's some good underlying sort of foundational trends here that are coming through. As you said, we've picked up share, script count is up, we're just rolling out delivery. So like we're seeing in grocery, units are better, dollar share is getting better. So we feel good about pharmacy.

Your next question comes from the line of Scott Marks from Jefferies.

In the prepared remarks, you made some comments about the consumer under pressure between higher gas prices, some of the changes to the SNAP programs. Wondering if you can just give us a little bit more detail around what you're seeing from the consumer, specifically across different income cohorts? And what you're seeing just in terms of purchasing behaviors and habits?

Yes. Thanks, Scott. I would say that averages can always be a little bit misleading. So you need to get into the detail. SNAP, I would say, is most impacted across 3 states, in particular, and we see a bit of that flow through. In terms of the price of fuel having an impact, when that price gets up to what it has, I think we see that some of the basket sizes, some of the items that people buy tend to be traded down a bit. I think that helps probably with Our Brands and how we're operating.

So SNAP has varied across the country. Petrol is more wide spread right across the country. We would say that based on the share data that we're seeing and the positive results that we're getting out of that, we're doing okay. We're managing through this, and I'll go back to the comment I made previously. I think we're threading the needle nicely between delivering the right level of profit and the right level of price.

Your last question comes from the line of Paul Lejuez from Citi.

[indiscernible] on for Paul. You all mentioned that freight costs were higher than you initially expected. I was just wondering if you could share the magnitude of that impact in 1Q and the impact that had on e-com profitability? And then what have you contemplated for freight costs for the rest of the year? And if you could share maybe offsets that you're working through there?

Yes. So let me take that one, Paul. So as we've said in the script, that it cost us about 15 basis points on the gross margin line. So without that, the gross margin line would have been slightly positive.

On e-com profit, whilst they cost us a bit, we're making really good progress on e-com profit. We turned profitable in the quarter. And it wasn't just as a result of the closing of unprofitable Ocado sheds. We made progress really across the board. Great -- I think it was the record level or lowest level cost to serve that we've seen. Wait times were best ever. I think we've got many more opportunities to improve that through the balance of the year. Fuel prices are very hard to predict through the balance of the year. I'd love to be able to do that perfectly. Obviously, we can't. So we think we've made a sensible assumption in the guidance through the balance of the year. We think it's a manageable headwind. We think we've got enough in the tank to be able to deal with it.

Obviously, we hope, like everybody else does, that the news coming out of the negotiations between the U.S. and Iran alleviate some of those pressures. But we're prepared to deal with it regardless of what the outcome is.

We have reached the end of the Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.

Good morning, and welcome to The Kroger Co. Fourth Quarter Earnings Conference Call. My name is Alex. I'll be coordinating today's call. [Operator Instructions] Please note that this event is being recorded. I'd now like to turn the conference over to Rob Quast, Vice President, Investor Relations. Please go ahead.

Good morning. Thank you for joining us for Kroger's Fourth Quarter and Full Year 2025 Earnings Call. I am joined today by Kroger's newly appointed Chief Executive Officer, Greg Foran; Chairman, Ron Sargent; and Chief Financial Officer, David Kennerley.

Before we begin, I want to remind you that today's discussions will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger Company assumes no obligation to update that information.

After our prepared remarks, we look forward to taking your questions. [Operator Instructions]. I will now turn the call over to Ron.

Well, thank you, Rob, and good morning, everyone. Thank you for joining our call today. Before we start, I'd like to just take a moment to welcome Greg Foran as Kroger's Chief Executive Officer. Greg is a strong leader with a proven track record of driving growth in large and complex businesses. He has spent most of his career in food retail, and he understands what it takes to run great stores and build a strong e-commerce business. His priorities align closely with the work we've been doing over the past 12 months, putting the customers at the center, moving with urgency, strengthening our e-commerce business, accelerating media and improving productivity to invest in lower prices.

Many of you will know his background. He started as a store associate at Woolworths in New Zealand and eventually led Walmart U.S. where he was responsible for thousands of stores as well as over a million associates. During his tenure, the business delivered consistent sales growth while improving store operations and building e-commerce capabilities. Most recently, Greg led Air New Zealand during the pandemic, one of the most challenging periods in the history of the airline industry, helping position the company for a solid recovery and leading their digital transformation.

Greg is the right person to lead Kroger, and we're excited to have him. He will close our prepared remarks today with his early impressions and focus areas, as he steps into the new role.

Now turning to the fourth quarter. We're pleased to report another quarter of strong results, capping off a strong year for Kroger. Importantly, in the final period of the year, we achieved positive market share growth for the first time this year. For the full year, we nearly doubled our identical sales without fuel from 1.5% to 2.9% and grew earnings per share by 9%, which was at the high end of our earnings expectations.

This performance speaks for itself. We're executing on our priorities and delivering results. This year, we've been intentional about focusing on what matters most to our customers, and this work has laid the foundation for long-term growth. Today, I'll talk about the things we got done and the proof points of our progress.

In the fourth quarter, we continue to make meaningful progress on our core priorities; improving the customer experience, simplifying our business and ensuring we have the right talent in place to move with speed. These actions are strengthening our competitive position today and are building a more efficient customer-focused company for the future. Serving our customers better starts with delivering value and making the customer experience easier.

This quarter, we again made price investments to lower everyday prices and to offer more promotions, and this improved our value perception with our customers. We also added store hours during the holidays, particularly in high traffic departments, so more associates were available when customers needed them most. These changes improve checkout times and contributed to positive trends in customer satisfaction. As part of simplifying the business, we announced the sale of Vitacost and plan to close nearly 50 underperforming little clinic locations.

We also continue to review all noncore assets to determine their ongoing contribution and role within the company. These decisions reflect our commitment to running a more efficient company and focusing on priorities that add the most value. A strong leadership team is also essential to moving faster and executing our strategy. This quarter, we promoted Victor Smith to Senior Vice President of Retail divisions, along with new division presidents in Atlanta, Fry's and Ralphs, each with deep operational experience and a track record of running great stores.

These leaders were developed within our organization, which speaks to the depth of talent we have across the company. This week, we also elevated Milen Mahadevan for a newly created role to lead artificial intelligence work across the company, reinforcing the priority that we're placing on AI. Milen most recently served as President of 84.51°. We see AI as a meaningful opportunity to both improve the customer experience and drive productivity across our business. We're already seeing results from more competitive pricing, improved shrink to faster fulfillment and tools that help our associates work more efficiently.

As we move forward, we plan to expand these capabilities, including Agentic shopping on our digital properties. Milen's appointment ensures we have dedicated leadership to accelerate this work. As we look back over the full year, we took several important steps to position Kroger for future growth. We lowered prices on thousands of products making it easier for customers to see the value we offer. Customer price perception improved across the company, and we maintained our competitive positioning against our major competitors.

We created a dedicated e-commerce team and completed a comprehensive strategic review of our e-commerce operations, that led to an updated hybrid fulfillment model, which will better meet customer expectations. These changes will make our e-commerce business profitable in 2026. We delivered substantial cost savings across the organization through operational efficiencies and modernizing how we work. We then reinvested those savings directly into lower prices and improved customer service.

We made difficult, but necessary, decisions to close underperforming stores and reduce corporate headcount to create a more agile and focused organization. We accelerated our new store investments in 2025, completing 29 major projects. And in 2026, we expect to increase new store openings by 30% with plans to expand into 2 new regions including Jacksonville and Kansas City, 2 high potential markets that will support our long-term growth.

Collectively, these actions simplify how we operate and sharpen our focus on the core business. They also position us to reinvest in the areas that matter most to our customers, more value and best service. We've made strong progress, and there's more to do, which Greg will touch on later.

This is how we're building a stronger foundation for sustainable growth in the years ahead. Before walking through the quarter, I want to briefly comment on the customer environment. Customers remain focused on value in the fourth quarter, which was consistent with the trends that we've seen throughout the year, and we are continuing to invest in price to make sure we're delivering the value customers expect.

Now turning to our results. Identical sales without fuel grew 2.4% this quarter, which includes nearly a 40 basis point headwind from the Inflation Reduction Act. Weather had a neutral impact on a year-over-year basis. For the full year, identical sales without fuel grew 2.9%, in line with our full year guidance. We saw continued strength in e-commerce and pharmacy, along with solid performance in key areas of the store like Fresh.

Importantly, food volumes improved and grocery sales were a larger portion of our sales mix, which is a positive sign going forward. Our market share trends improved in the fourth quarter, and for the full year, and I'm pleased to report that on our final period, we delivered positive share gains, our strongest share performance since 2021. We believe the price investments we've made throughout the year are resonating with customers and are contributing to these results. And we made these investments while still improving our full year gross margin rate, excluding fuel and adjustment items by improving shrink and productivity.

We're committed to this balance, investing in lower prices while being disciplined in our margin management and the work we're doing to find efficiencies across our business allows us to do both. David will speak to these factors in more detail.

Our brands had a solid quarter. Excluding the impact of egg deflation, sales continued to outpace national brands. Simple Truth and Private Selection, again led our growth with customers continuing to choose these products because they deliver high quality at an affordable price.

Innovation continues to be a priority. This year, we introduced more than 1,100 new Our Brands products, up from more than 900 last year. A growing number of these products are focused on health, an area where customer demand is growing and Our Brands portfolio is well positioned to lead. Our e-commerce business continued to be an important growth driver and one of the key ways we attract new households. Adjusted e-commerce sales grew 20% this quarter and we've now built this into a $16 billion business.

We also continue to make meaningful improvements in e-comm profitability. As this business grows, the profitability improvements we're seeing become increasingly significant to our P&L. E-commerce growth also fuels our media business. More customers shopping online means more impressions, more data and more value for our advertising brands. That connection between e-commerce and media is key to how we accelerate profitability, and we see significant runway ahead.

The early results from our new relationship with DoorDash and Uber Eats have exceeded what we originally planned. They have extended our reach to customers and shopping occasions we wouldn't otherwise capture. They're incremental, and they are profitable. Together with Instacart, we expect our convenience offerings to deliver over $1.5 billion in sales in 2026, which will help us accelerate our e-commerce growth.

Before I turn it over to David, I'd like to take a moment to reflect on the progress we made this year. We took important steps to strengthen Kroger for the long term; lowering prices and improving store execution to better serve our customers; enhancing our e-commerce business to deliver growth, while improving profitability; accelerating our store footprint; taking meaningful action on our noncore assets; and strengthening our leadership team with key appointments. These actions reflect our focus on serving customers better, running great stores and simplifying the company so we can move faster.

And to our associates listening in, thank you. I'm proud of what this team has accomplished. The work you delivered has built a stronger, more focused company, and I'm confident in where we're heading. It has been a privilege and I'm honored to continue serving on the Board as we enter this next chapter.

And with that, I'll turn it over to David.

Thank you, Ron, and good morning, everyone.

Kroger delivered another strong set of results this quarter in an environment that remains dynamic. We executed well, delivering solid e-commerce growth, maintaining cost discipline and achieving our profitability goals. From a financial perspective, this was a year of both strong performance and deliberate investment in the future. We invested in price while improving our FIFO gross margin rate, excluding fuel and adjustment items.

We accelerated e-commerce profitability, and we improved our cost structure to redeploy those savings into areas that drive growth. These actions strengthen our financial foundation and support sustainable performance going forward. The momentum in our business gives us confidence in our outlook for next year.

Today, I'll start by covering our Q4 results in more detail and highlight some key full year metrics and then share our guidance for 2026 and the key drivers behind it.

We achieved identical sales without fuel growth of 2.4%, a strong result that includes a nearly 40 basis point headwind from the Inflation Reduction Act. On a 2-year stack basis, identical sales without fuel grew by 4.8%. Growth was primarily driven by improving trends in units. As Ron mentioned earlier, our share trends improved in 2025 with fourth quarter trends again improving and culminating in positive share gains in our final period of the year.

Sales growth was led by e-commerce and pharmacy, along with strong performance from Fresh. As Ron mentioned, what's encouraging is the underlying composition of that growth. We saw continued improvement in food volumes with grocery sales representing a larger portion of our overall sales mix. Pharmacy had another strong quarter led by growth in both core scripts and GLP-1s. That said, Pharmacy contributed nearly 50 basis points less than in the third quarter reflecting the impact of the Inflation Reduction Act and an accelerating shift from brand to generic beginning in January.

Food inflation moderated further in the quarter, down approximately 90 basis points compared to Q3, with egg deflation a significant headwind, partially offset by beef inflation. Our FIFO gross margin rate, excluding rent, depreciation and amortization and fuel was flat in the fourth quarter compared to the same period last year. This result was primarily attributable to sourcing improvements, lower supply chain costs and lower shrink offset by price investments and the mix effect from growth in pharmacy sales, which has lower margins.

When we provided our second half outlook, we updated our FIFO gross margin rate expectations, excluding fuel and KSP, to be relatively flat for the full year. We delivered better than that, and as our rate improved in the second half of the year, primarily driven by our performance in the fourth quarter with favorable mix and better shrink results.

For the full year, excluding the effect of KSP, fuel and adjustment items, we improved our rate by 14 basis points, while investing more in price, reflecting the balance we are focused on achieving between delivering value and maintaining margin discipline. The operating, general and administrative rate, excluding fuel and adjustment items, increased 21 basis points in the fourth quarter compared to the same period last year. The increase in rate was primarily attributable to cycling real estate gains from a year ago and labor investments to improve customer experience, partially offset by lower incentive plan costs and improved productivity.

We continue to make progress on improving our cost structure and importantly, we're generating more durable cost savings, which we are reinvesting into stores and the customer experience to deliver better service and more value to customers. With that said, we believe we are still in the early stages of what we can achieve. Sourcing and procurement remains a significant opportunity together with modernizing our ways of working, we see substantial runway for cost savings ahead.

Our LIFO charge for the quarter was $11 million compared to a LIFO charge of $30 million last year. On a full year basis, our LIFO charge was $157 million in 2025 compared to $95 million last year, resulting in a $0.07 headwind to EPS. We expect our LIFO charge in 2026 to be similar to 2025. Our adjusted FIFO operating profit in the quarter was $1.2 billion. Q4 adjusted EPS was $1.28, reflecting 12% growth compared to last year. For the full year, adjusted EPS was $4.85 and grew by 9%, coming in at the top end of our long-term growth expectations.

Fuel results were better than expected this quarter, driven by strong fuel margin performance even as gallon volumes declined. Q4 fuel profitability came in ahead of last year. Fuel continues to be an important part of our strategy, building loyalty through our fuel rewards program and providing another source of value for our customers.

I'd now like to turn to capital allocation and financial strategy. We delivered strong adjusted free cash flow of $3.9 billion this quarter (sic) [ for full year ] , exceeding our expectations. This was driven by the strength of our operating performance, good progress on a range of working capital initiatives and favorable year-end timing. Our balance sheet remains healthy with our net debt to adjusted EBITDA ratio still below our long-term target range. This gives us the financial flexibility to pursue growth investments and other opportunities to enhance shareholder value. Over time, we expect to move back towards our target leverage ratio.

During the year, we completed our $7.5 billion share repurchase authorization. This included a $5 billion accelerated share repurchase program, followed by open market repurchases, which completed our remaining authorization in Q4. In December, our Board approved an additional $2 billion share repurchase authorization, and we expect to complete these repurchases by the end of fiscal 2026.

Our capital allocation framework remains consistent. We are focused on investing in opportunities where we can generate the highest long-term returns and improving ROIC remains a core priority. We are encouraged by the progress we're making on our major store projects and our recent remodels are delivering higher-than-expected returns. These investments will be important to driving ROIC improvement over time.

I'd now like to share our guidance for 2026 and walk through the key factors shaping our outlook. We expect identical sales without fuel growth in a range of 1% to 2%. It is important to note that the Inflation Reduction Act will create an approximately 130 basis point headwind to identical sales without fuel this year, reflecting the impact of lower reimbursement rates on key medications while having no impact on gross profit dollars.

Excluding the IRA impact, we would expect identical sales without fuel growth in a range of 2.3% to 3.3%. In terms of quarterly cadence, we expect Q1 identical sales without fuel to come in near the low end of our full year range, driven primarily by continued egg deflation. As this headwind eases, we expect sales trends to improve. A few other dynamics to keep in mind as we think about the year. We expect overall inflation to be lower than it was in 2025. Within Pharmacy, we expect sales growth to moderate to low to mid-single digits, reflecting the impact of the Inflation Reduction Act on reimbursement rates and the ongoing shift in brand to generic mix, which is currently greater than we've seen in the past, partially offset by continued GLP-1 adoption and script growth.

We'll also continue to regain ESI households, though progress remains gradual, and we do not expect to fully recover the business we previously lost. We expect e-commerce to accelerate from 2025 growth rates with continued strength in delivery and increased store-based fulfillment through our third-party delivery providers. We're also enhancing our loyalty program in 2026. This includes updates to our rewards program and a revamped Kroger credit card, both designed to deepen customer engagement and drive increased shopping frequency across our in-store and e-commerce channels.

Total sales without fuel should be slightly lower than identical sales without fuel, reflecting an approximately $350 million headwind from the closure of our Florida fulfillment center and $300 million headwind from the sale of Vitacost partially offset by new store openings. We expect adjusted FIFO operating profit in a range of $5 billion to $5.2 billion.

We will continue to drive greater value for our customers by investing in price, both in everyday value and through promotions, and we expect these investments to increase compared to 2025. We are also investing in the customer experience, particularly in service and labor hours, ensuring our stores are well staffed. Even with these increased investments, we expect our FIFO gross margin rate, excluding fuel and adjustment items, to improve in 2026. These investments will be funded through increased productivity and cost savings. We expect to exceed our 2025 cost savings with increased contributions from 2 areas, in particular, e-commerce and procurement.

In e-commerce, we will lower our cost to serve by fulfilling more orders out of stores, closer to our customers and by leveraging our third-party delivery providers. In procurement, we are going after both cost of goods sold and goods not for resale with a level of intensity that reflects the scale of the opportunity. In Fresh imports, national brands and Our Brands, we are renegotiating supplier agreements, going direct where we have historically used intermediaries and ensuring that every dollar of Kroger's purchasing power is working for us and our customers.

The savings we generate flow directly into lower prices for our customers. We have dedicated teams focused on these areas, and we are confident in our ability to deliver. Our Media business delivered solid results in 2025, and we expect to build on that momentum. Our merchandising and Media teams are working more collaboratively, which is improving the quality of our activations and outcomes for brands. In 2025, our alternative profit businesses, which include Media, Kroger Personal Finance and Insights, delivered $1.5 billion in operating profit, and we expect Media to deliver double-digit growth in 2026.

To support our modernization efforts, we are launching the Kroger Global Capability Center. This initiative is designed to streamline decision-making, improve productivity and increase the speed at which we execute on behalf of our customers. It complements the work already underway across the organization to modernize how we operate. Work has started and is progressing with speed. We expect modest benefits in 2026 with more significant benefits expected in 2027 and 2028.

Turning to capital allocation. We will continue taking a disciplined approach focused on long-term shareholder value. We expect capital expenditures of $3.8 billion to $4 billion with increased investments in new store growth. These new locations are strategic investments in our future. They follow a natural maturation curve. It takes time to build customer awareness, establish traffic patterns and reach profitability. In early months, we absorbed start-up costs and elevated labor expenses as we staff up and invest in training. This is expected, and it reflects the same disciplined approach we have executed successfully for many years.

These stores will drive volume growth, expand our customer base and strengthen our presence in key markets. We are confident they will deliver meaningful long-term returns. As part of our new store strategy, we're also testing different formats and bringing fresh thinking to the in-store experience. That means evaluating new concepts, making sure every element of the store is relevant, productive and aligned with how customers want to shop today. Beyond new stores, our capital investments will support technology and AI, where we are investing aggressively.

These investments serve 2 purposes: improving the customer experience and driving productivity throughout the company. This year, we're introducing Agentic AI shopping for our customers, which will help them discover items, build baskets, plan meals and stay within budgets, all in a personalized way. We're also investing in supply chain modernization with more automation and expanded capacity. And we'll also continue investing in our remodels to ensure our stores deliver a consistently strong experience. We expect adjusted free cash flow of $2.7 billion to $2.9 billion and adjusted net earnings per diluted share of $5.10 to $5.30. I will now turn the call over to Greg.

Thank you, David, and good morning, everyone. I'm excited to be here and grateful for the opportunity to lead this great company. It's been about a month since I started, and I've spent that time learning Kroger from the inside out. I've been spending time with Ron and the leadership team, having one-on-one conversations with leaders across the organization and getting out to visit stores, distribution centers and manufacturing facilities. And importantly, also watching how our customers shop.

I've begun working with the team to review our strategic plan, and I'll share more as that work progresses. What I've seen so far has reinforced my belief that Kroger has tremendous strengths to build on. We have a loyal customer base, dedicated associates, a strong store network and real momentum in areas like Fresh, e-commerce and Our Brands. I've also been impressed by the energy I've seen in the stores, associates taking ownership of their work and taking pride in serving customers. The team has done excellent work, particularly over the past year to strengthen the business. And my focus is on how we operationalize our strategy to make us even better.

It starts with the top line. We need to grow sales faster. And in my experience, that comes down to giving customers a compelling reason to shop with you by offering great value, great products and a great experience. Price is an important part of that equation. Customers need to trust that they're getting a fair deal every time they walk into our stores. We've made progress on price, and I want to keep pushing by pulling unproductive costs out of the business, investing in everyday value, sharpening our promotions and making sure customers see and feel the difference when they shop with us. When you combine competitive prices with strong Fresh and a well-run store, you drive traffic, you grow baskets and you gain share. That's what I want to accelerate at Kroger.

I've spent my career in food retail and running great stores is how you make that happen. It's about delivering a great experience consistently in every store on every visit, with a shopping in store or online. Fresh is a good example. Customers develop a lasting impression based on the quality of fresh foods, which is incredibly important as we accelerate e-commerce, get those right and we earn their confidence. My focus will be on continuing to improve execution and ensuring our associates have the tools and support they need to serve customers well.

To invest more aggressively in the customer experience, we have to be disciplined and aggressive on costs. I see significant opportunity here, and we're going after every available margin dollar across the business. Some of that is buying better, improving how we source and procure products. And some of it is improving productivity by streamlining processes and modernizing our ways of working. The savings we generate will be reinvested directly into lower prices and better service for our customers. That's how we will fund our growth.

Customers want convenience and are increasingly shopping online to buy food. We have the assets to meet that demand and e-commerce is a key focus area for us. We've built this into a more than $16 billion business with 7 consecutive quarters of double-digit growth. There's a strong foundation, but we need to accelerate it. Our stores are central to how we serve customers online.

Our refreshed hybrid fulfillment model, which better leverages the stores and delivery providers like Instacart, DoorDash and Uber Eats, positions us to accelerate growth while reaching profitability next year.

By using our stores as fulfillment hubs, we get inventory closer to customers, reduce last mile costs and offer the speed and convenience that customers are looking for. Our Media business is closely tied to this e-commerce momentum. We have the data, we have the customer relationships, and we have the platform. As e-commerce grows and our digital capabilities expand, we see a long runway to accelerate growth. My goal is to do all of this while protecting our margins. The investments we're making in price and the customer experience are funded by the cost savings and efficiencies I described and by growth in Media. That discipline is essential. We will grow the top line and gain share, invest in the customer and deliver long-term value for shareholders.

I've been in food retail a long time, and I know what good looks like. It starts with the customer. It's built on strong execution in our stores and online. And it requires a team that wants to win and is willing to move fast. That's what gives me confidence. Kroger has all the ingredients to win, and my job is to bring it all together. We'll now open it up for questions.

[Operator Instructions]

Our first question for today comes from Krisztina Katai of Deutsche Bank.

Welcome, Greg, to the Kroger family. I wanted to focus on your initial assessment. You obviously emphasized the need to grow sales faster. You talked about offering great value. So beyond price investments, can you dig a bit into the initiatives or the strategic shifts you envision to significantly accelerate the top line growth? And we think about a potentially softening or more price-intensive environment, protecting the margin that you talked about. Just how much runway do you see for further improvements in sourcing and procurement?

Look, Krisztina, it certainly is pretty early for me. I'm just into my fourth week here. What I would say is that the foundation that Ron and the team have built is incredibly solid. So decisions that have been made, particularly in the last year set us up. Do we need to do more in price? For sure. But the work is underway on that. I need to spend more time to get into the math that is around that. But as David has pointed out in his remarks, we see opportunities. We see opportunities in cost of goods sold. We see opportunities in doing a better job with imports. We see opportunities in the Kroger capability center.

And then there'll be the normal ones around shrinkage and other areas in the business that we can lean into. So as I work through this over the next sort of 90 to 100 days, I'm working with the team closely. We'll pull this together. and see how the numbers come out and at an appropriate time before the end of the year, we'll share some real detail with you. Now on top of that, we know the inherent strengths we have in the business. We've got a great Fresh business. We need to make sure that it's consistent right across every store every day.

We know we've got a great Own Brands Business. We know that we can accelerate e-commerce and the decisions that have been made by Ron and the team put us in a great position. As you accelerate that, you can accelerate Kroger Precision Marketing. So look, 3.5 weeks in, I'm still doing lots of homework, but I'm feeling good about what we've got in front of us. So lots of runway.

That's great. And then if I could just have a follow-up. I mean you have a newly created AI role. Can you maybe for Kroger as a whole, just talk about maybe the talk through 2 to 3 specific quantifiable targets for AI's impact on the customer experience and productivity that you would expect to achieve in the next 12 to 24 months?

Krisztina, it's David. Let me take that one. Listen, we see AI as a big opportunity, and it's an area we're excited about. Obviously, Ron talked in his remarks about the appointment of Milen to lead this work. And I think that, that makes a big statement about how serious we're taking this. And we have significant investment dollars in 2026 and beyond targeted at making sure that we crystallize this opportunity.

What I'd say is, like many other companies, we're at the early stages. We've made some good progress, but we've got a lot more to do. And I think we've got already some emerging good proof points of the work that we're doing. I think if you look at areas like operations, some of the shrink results that you've been seeing from us are driven by technology and AI. And that's an area where I'd expect us to continue to invest.

In the people space, we've got some really good tools that are improving the employee experience, helping us manage labor better, help us schedule labor better. And I think, of course, there's then Agentic shopping. We've got our own digital shopping assistant live in a couple of divisions. That's on the Kroger platform, and we'll expand that later this year to all divisions. We've obviously announced the partnership with Google. And I think there's a lot more to come in the Agentic space, leveraging the advantages that we have on quality, freshness, et cetera. So I think a big area of focus for us, some good early proof points, the organizational and foundational investments we're making super critical and much more to come, both from a customer experience and what I'd call productivity experience.

Our next question comes from Michael Lasser of UBS.

Welcome back, Greg. My first question is, can you contextualize the absolute dollar level of investment that was made in the fourth quarter in order to stabilize the market share? How does that inform how you're going to invest over the next several quarters? And how do you balance this need to improve value perception without sparking a response from your discount-oriented competitors that results in a race to the bottom in terms of profitability.

Michael, it is David. Let me take that one.

So I think as we've been talking about, value perception, closing price gaps has been an important priority for us all year. And we've been deliberate about investing in promotions, giving consumers ways to stretch their budgets. And as we built our plans for 2026, it was a very, very deliberate area of focus for us, that we needed to do more. So whilst we're making progress on everyday price gaps and what we call the all-in price gap, it's an area where we know we need to be more competitive.

So as we think about next year, it is an area where we've put more dollars candidly than we have really over the last several years. But we've done that and they're going to be focused on this, doing this in a very deliberate way to balance the margins. As I talked about in the preprepared remarks and as Greg has already touched on as well, we see a very big opportunity for us to optimize the cost structure of the business. And I think about -- as we think about this going forward, we want to be able to take those unproductive costs, and we want to be able to, number one, invest those back into the -- both pricing and store experience whilst balancing the margins.

I think as you sort of talk about the response from competitors, I mean, candidly, we're focused on what we can control. We're certainly not interested in starting price wars, but we know that we want to make sure that when consumers walk through the door of a Kroger store or any one of our banners, they walk in and can get good affordable prices. So that's the way we're thinking about it.

And Michael, let me just add to that just briefly. As you can guess, we monitor our competitors all the time, and we certainly have a healthy respect for all of our competitors. But when you look at our share trends, we have improved share trends 5 quarters in a row, and we're happy they turned positive in January. And as I said before on this call, this is not a zero-sum game. At Kroger, we're playing to our strengths, whether it's Fresh categories or Our Brands or deep first-party data, our growing omnichannel business with e-commerce growing 20% last quarter. And these are not easy things to replicate in a hurry. And when you look at our focus, it's really to be a consistent and trusted local grocery retailer, whether a customer shops in-store or online. Greg recently said it very well. He said, we want to be the best Kroger we can be.

Got you. Very helpful. My follow-up question is on the outlook for free cash flow. Your CapEx is going to be similar to what it was last year. Free cash flow is going to be down a bit. So a, can you explain the moving pieces there? And b, what is the distribution of the CapEx going to look like? With more new stores, how much will be invested in supply chain and the digital business to remain competitive, especially as you're leaning on some of these third-party providers for more of your incremental market share within the digital arena?

Yes, Michael, let me take that one. So on free cash flow guidance, let me comment first on the cash flow number that we delivered this year. I mean we delivered a really, really strong cash flow performance in 2025 that came in ahead of the expectations. The way I'd characterize that overdelivery is kind of in 2 buckets. Number one, we've been working on a range of working capital initiatives around AP, AR, in normal buckets that you'd expect. And candidly, we delivered really well on those. And so we're really, really proud about those. And candidly, it will be an area of focus as we head into 2026 and beyond.

But there's another bucket where we had a number of timing-related items that as we built the guidance and the plans for 2026, we don't think we're going to be able to kind of lap those. So they'll effectively reverse, which is what influenced the guidance range that we've offered.

On CapEx, spent a lot of time on our CapEx, making sure that we're prioritizing investments in the right areas. The big area that kind of really steps up year-over-year is candidly on our storing program, both on new stores and remodels. And it was important for us to make sure that we had the right level of investment against that. But we went through a very, very deep prioritization exercise against all of the other areas. And I'd say the biggest area where I think we were able to optimize, it's kind of what we call sort of run the business maintenance CapEx. And I think we have an opportunity there to both optimize the returns, but also we had some things that candidly, we just didn't need to spend on. Now that doesn't mean that we're not doing the right things, not investing in the right areas, but we were able to optimize that area or spend while making sure we had the right investment on storing, supply chain, e-commerce. So hopefully, that gives you a good sense of the makeup and the priority choices that we made.

Our next question comes from Leah Jordan of Goldman Sachs.

Congrats, Greg, on the new role. I'll start with my first question for you. I know it's early days. You're still reviewing the business. But maybe if you could provide more detail on the opportunities you see regarding the in-store experience. Any color on maybe opportunities to accelerate remodels there or how you're thinking about labor hours?

Yes, sure. It is very early days. I think I have been out in stores 3 days. I've gone to manufacturing facilities, one of them and also a distribution center. So I need a little bit more time to get around the business. I'm getting out, obviously, whenever I can. And clearly, a lot of the stores I'm getting to at the moment are probably announced visits and that people are expecting me to show up. So I won't necessarily be seeing the full unvarnished Kroger at this point, but that will happen.

Look, I like the fact we're in the supermarket business. I like the fact we are primarily in the food business. When I go into stores that are sort of 50,000 square feet trading area or 70,000 square feet trading area or 90,000 square feet trading area, I like those. I think they're working really well. Now the marketplaces do too. But we're in the food business. And we generally, when we get it right, are anchored around a pretty good fresh offering, whether that's produce or meat or bakery, deli or seafood, really extensive grocery assortment. Some may argue, in some cases, too extensive. But early days, we will work our way through that.

Our Brands are powerful, and we've seen the growth in those. So you start to pull this together, and I like the mousetrap that I see at Kroger and its associated brands. But let's be clear, it's only the beginning of my fourth week, and I've only got out there 3 days plus got to 1 DC plus manufacturing facility. But I like what I'm seeing, and I see plenty of upside.

Now the obvious one, which we've picked up on the call is we've got to continue to work on price. And part of the focus that I'm going to have over this next 100 days is working with Ron and David and Mary Ellen, and [ Gia ] , all the team. It's got to be a team effort here. What else do we need to do in order to get ourselves going? Because at the end of the day, what does success look like? It looks like us selling more units. It looks like us gaining market share, and that turns into better identical sales or comp sales. And we've got some good progress.

I think Ron and the team, as I said, have done a great job building some momentum. My job now is to see whether we can operationalize that and move even faster. But the basics, I like what I see. I don't think this is about Kroger coming up with a completely different strategy. I think we've got a good strategy. It is about executing well, and it is about moving faster. So those are the sort of things that strike me after 24, 25 days.

That's very helpful and a lot we'll look forward to. Maybe just for a quick follow-up from David on the guide. For the ID sales guide, maybe just more detail on your embedded assumptions as we think about the drivers as we move through the year, especially around tonnage and market share, given Greg's comments. I came away from your earlier comments that, hey, once we get past 1Q, it's more inflation-driven, but anything else to call out there?

Yes. I mean I think inflation Leah, is kind of moderately lower than last year. So maybe let me kind of talk about the units, which I think is at the root of your question. Obviously, as Greg just said, I mean, unit growth is critical. And it's a big priority for us to improve. And as I reflect back on last year, it did improve sequentially as we went through the year, and Q4 was the best quarter that we had in terms of units.

But nonetheless, units remain slightly down. So I think as we think about the cadence for next year, the priority is keep improving and keep improving quarter-on-quarter. Our expectations are, I still think we'll see negative units in the first half of the year. But as we move sequentially through the balance of the year through a combination of our price investments, which will ramp up, new storing, accelerated e-commerce growth, there's a possibility that we move into better territory on units. But that hopefully gives you a sense of the cadence as we move through the year.

Our next question comes from Simeon Gutman of Morgan Stanley. So Greg, it's early.

Greg it is early. So you mentioned early gotten out a few weeks. Great. I want to push on this self-funding idea. It sounds like it's a goal. Curious how nonnegotiable it is, meaning that's the only way you're looking at the business? Or do you reserve the right after you've given your own time to review the plans and the business to decide if the level of savings is commensurate with the amount of value that you want to achieve?

It's a good question, Simeon, and one that I've been asking myself, obviously. When you write these things in the script, you got to be reasonably comfortable. I would say to you that I have a degree of comfort at the moment that what I've seen indicates that we will be able to do this. I think what's probably going through your mind is 2014 and Walmart. 2014, at Walmart, we were paying, I think, about $7.63 an hour, and we were losing a lot of our associates. So I knew that we would have to do something in terms of fixing that. I knew we had a lot of work to do around fresh, and we wanted to roll out online grocery. So that would require some investment.

I knew we would have to get in and do remodels and those sort of things. So I formed a view some 10-odd years ago of what was going to be required. Obviously, I've been able to get up to speed as quickly as I can here with Ron and David and the team. They haven't been sitting on their hands. They've been hard at it and made, I think, some really good decisions around Ocado, around getting new stores up and running, around getting remodels back underway.

So I'm coming in here with a business that has a good foundation, and I'm very thankful for that. And my early view, when I look at things like imports, and we don't tend to import very much in Kroger directly. So we're a big business, $150 billion. So we need to start changing our approach and start going direct to the source. Generally, any business I've been in, Simeon, there's opportunities around COGS and my sense is that's not a lot different in this business.

I have now walked 2.5 of the 4 offices that we have in Cincinnati, every single floor, meeting any associate who is on track. I've got about 6 more floors to do in this actual office here and one more building to do, but I've done another building, most of this and all of 84.51°. On top of what we're doing in the Kroger Capability Center, we can continue to look at how we take cost out. But we need to get into that Kroger Capability Center, and we need to get in there in a reasonably serious fashion, sensible, but serious and execute. So after 20-odd days, I'm sitting here and I'm saying "I'm comfortable with what I've said in the script." And of course, will know a lot more over the next 90, 100 days and as we do, my commitment, David's commitment, Ron's commitment is we're going to go and present that to you and share with you what's on our mind and that will happen well before the end of the year. But at this stage, I'm feeling okay.

And the follow-up is that if you track the improvement throughout the year in share, which culminated in share gains in Q4, is it resulting of e-commerce or stores? I mean, I think we're indifferent. And then is there any categories in particular that it was concentrated? And if you can talk about the movement about through the year?

Yes. Simeon, it's David. So just to clarify, we didn't gain share in Q4. So we still lost share in Q4, and it was a sort of -- we gained share in period 13. So I just want to clarify that. As I -- as you think about the categories where we did, in my mind, a little bit better relative to where we've sort of seen trends running, we did better in areas like meat and seafood, particularly meat, that was an area. We did substantially better in the deli and in bakery. Those were probably the 2 big areas that stood out. And I think meat, in particular, was an area where we deliberately made investments given the inflation that consumers are facing to drive units.

The churn on grocery was better.

Yes. Our next question comes from Michael Montani of Evercore ISI.

Congratulations. I'll echo to Greg. Good to have you back. If I could, I had a question for David and then a follow-up for Greg. So maybe just to start with David, could you talk a little bit about the quarterly cadence you see playing out for EPS relative to the Street. So in 1Q, you mentioned comps could be at the lower end. Does that mean we need to kind of commensurately look at the earnings growth, which is 13% there? And then anything on gross margin for the year relative to G&A?

And then the follow-up I had for Greg was just about if you think over the next several years, you've got competitors who are known for kind of winning on price, others for kind of online delivery. What do you think will be the hallmark of Kroger that allows you not just to compete, but actually to win on unit volume longer term?

So let me take that first question. So I think the only quarter that we're going to -- we've sort of specifically kind of guided on beyond the full year is on Q1. So we do expect Q1 ID sales to come in towards the lower end of our full year guidance range. Specifically, that's really mainly to do with the headwinds that we're facing on lapping eggs. And so I think the cadence in Q1 is primarily driven by that.

I think as you then think about gross margin, you'll see a similar thing. I think our gross margin will be lower in Q4, again, as a result of some of that egg deflation that we're seeing and then be broadly consistent throughout the year. but still positive to be clear, still positive in Q1, but slightly below the full year expectations. And then I think EPS guidance or EPS, again, slightly lower towards the lower end of the range in Q1 and then fairly consistent as you head through the year.

Thanks, David. Michael, to your second part of your question, I guess there are 5 things that come to mind as to why I am excited. I actually think I've got the best retail job on the planet. I'd begin by saying and echoing the point that Ron made, this is about being the best Kroger we can be. It's not about us trying to be someone else. And what I like about Kroger, I guess, are 5 things.

I like the fact that we've got a business which is pretty well anchored in fresh foods. We've got a business that can be very convenient and fast for shoppers, size of our stores, where they're located. I like the fact that as we work hard to get affordable, customers are going to have a choice. They can go to a really low-price discounter and not get quite as much assortment, maybe not get as good a fresh or they can go to Kroger or a Kroger banner and they're going to get a better experience. And for them, that will represent better value because we are affordable.

I like the fact that we are local. Now I haven't got all around the country, obviously, after 20-odd days, but I know a little bit about it. I've been to all parts of America previously. And I like the fact that Kroger has different brand names and it's seen as being local in the community. And then finally, having spent a bit of time down at 84.51° and seeing what we can do there and the caliber of the people, I like the fact that we can be pretty personal. And as you think about digital and where that's going, and we had the question previously on AI. I like the fact that we can be for you. We can deliver things for customers, that are specific to those customers. So I'm pretty excited about how the business is positioned. I think it's a great business. We'll be the best Kroger we can be.

Our next question comes from Ed Kelly of Wells Fargo.

Welcome, Greg. I wanted to ask, as you think about pricing and price gaps, and there's been a lot of talk about investment in price today. And I think Kroger has historically said, you don't need to be on top of Walmart. You just need to be close enough to win in a lot of your other competitive advantages. Can you talk about where the gap is today and where you think this gap needs to go? And then specifically, Greg, for you, my big picture question, I think, is there are a lot of cost saves in the business that you can attain. You want to keep a balanced approach, but the industry is moving rapidly. And are you moving fast enough with these initiatives? Or maybe better said, why not go faster?

Ed, it's David. Let me take this initially, and then I'll ask Greg maybe to kind of come in on sort of more on sort of core principles. So I think when we think about price spreads relative to the competition, we look at a number of things. Number one, we're looking at this from an item perspective. So there are certain items that you want to make sure that you are right there with the competition on. And then there are certain items that philosophically, we think it's okay to operate within a certain spread.

So we also then look at this from -- we obviously track every day price spreads, so kind of nonpromoted. But given we're a high-low retailer, it's also very, very important that we look at this all in. So we've been seeing this kind of improve throughout the year. And that is why we are putting a significant amount of money into this next year because we want to make sure that we're continuing to ensure that consumers have good value both on an everyday basis, but also when you look all in on a promotional basis.

So I think, listen, our objective is, as you said, it's not necessarily to be right there with the competition every day, but there are a certain set of items that are important from a basket perspective that we do need to be there right there with the competition.

I think the other thing, Ed, that's really important for us, and we hear consistently from our consumers is about simplicity. And one of the things consumers tell us is, "hey, it's just really complicated to figure out whether I'm getting the best price at Kroger" just because of the way some of our offers are structured. And so we're also doing work to make sure that we structure our offers in a more simple way so that they get good prices and they can understand them.

And that's really important because not only is the price important and the value that they get is important, but also the value perception. And I think there's certainly many arguments to suggest that price perception is equally as important as the price itself. So those are our focus areas, and I don't know whether Greg or Ron, you want to add anything.

Look, I think you said it extremely well. It is a combination of some KPIs, and it's also making sure we get the basket where we need to be. And there are some added value things that occur when you shop at Kroger that mean you don't have to necessarily match Aldi or anyone else in every single price point.

The customer works out what the value equation is and our job is to make sure that we deliver that.

Great question on speed. And I've said this a couple of times already, but I'm coming into a business where Ron and David and the team have already got a momentum shift in the organization. There's been a lot of work over the last year already on price. There's a lot of work that's been done on store execution. There's a lot of work done around e-commerce. And these have been very difficult but important decisions.

There's work underway on accelerating the store footprint. There's work that's been done on getting out of noncore assets and of course, some good leadership appointments, not mine, other good appointments in the business. So I'm well aware that you get 1 point for talking and 9 for doing. And part of what we're doing over the next sort of 90, 100 days is we're working hard now to take what we've got here as a strategy and building that out some further and then making sure that we've got the math around that so that we're comfortable with it.

We'll talk about that with Ron and the Board in detail. We'll then make sure that we've got it all buttoned up internally with our own team. And then we've got the people in place to execute this at speed. And that's going to be important. You're right that our competitors don't stand still. At the moment, they're going around that racetrack at a pretty good pace. We not only have to catch up to the pace that they're going, but we actually have to learn to go faster so that we can pull back on where they were. I'm looking forward to that challenge. I've never been more excited about the opportunity. And I think we have the assets, most importantly, in our people to deliver that.

And Ed, I'm just piling on a little bit, but our research would indicate that customers are really looking for value. And each customer defines that a little differently. And obviously, rewards is part of our offering, whether it's fresh categories, store conditions, great service, all those things are part of the equation. And I think it's more than just price.

Our next question comes from Robert Ohmes from Bank of America.

Greg, congrats. I look forward to seeing you again. And maybe for David and Ron, the -- actually, 2 questions. Just the first is just on accelerating e-commerce. I know it's early days, but any drivers to that beyond DoorDash and Uber Eats? I mean, are there other things that you guys are looking at, new strategies in either delivery or things that you're not doing? And then the other question, just maybe for David, fuel sales and profitability in 2026 might be tricky given what's been going on with oil prices. I would just -- any guide on what you guys are assuming in the guidance for the fuel business sales and profit headwinds?

Yes. I'll just start with the e-commerce. We're really excited about 20% growth in the fourth quarter. I said in the script that we plan to be profitable during 2026. The reality is we plan on being profitable in the first half of '26. In terms of how we're doing it, basically, we're working on a lot of different areas to just improve the experience with our customers. And whether that's the refreshed website, whether that's a lot of initiatives around AI and Agentic shopping. In-stock is a big focus, delivery service. So all of those things, those nuts and bolts things are really important to the growth of e-commerce this quarter. Obviously, the new partners help and will continue to help. And we are growing e-commerce business much faster than the market. And then as we mentioned, I think the third-party partners are on track to be over $1.5 billion on top of our organic growth in e-commerce this year.

Yes. Robert, let me take the question on fuel. So in the guidance and our plans for next year, we are expecting fuel gallons and profits to be slightly down year-over-year, a combination of gallons and margins.

Our final question for today comes from John Heinbockel of Guggenheim.

Two quick things. David hit on value perception. So when you think value perception as a lead indicator for food volume, your thought on that and by how much might it lead because I suspect your value perception is better than reality today. Thoughts on that. And then secondly, center store SKU rationalization, right, and the ability to tighten that up and then for what you do sell to have sharper, simpler prices, those 2 topics.

Yes. It's a very good question and one that I could spend a long time on. And hopefully, we will get some time and I can spend a bit more time than what I'm going to at this stage. As David said, it's going to be a combination of KPIs and basket and making sure that we hit the right value equation, which is a combination of what the actual cost is and the quality perception that customers have. So we're working on that at the moment. That's a homework assignment, which is happening right now in the business so that we can put some math against exactly where we need to be.

And we're not going to be able to do whatever we want to do in a matter of months. It needs to be a little bit like a glide path and the analogy that I've been using is it's a bit like a Boeing 787 coming into JFK, you're at 42,000 feet, you burned off all your fuel, and you've got to get down to basically sea levels. So you start at about 30 minutes out and your glide path your way in. So that's how we'll think about it, but the glide path can't go on forever, and we'll come back to you with the timing and how that looks.

In terms of it all, it is a bit of an ecosystem when you think about it. If you want to improve your e-commerce business and you're going to do more picking from stores, you need to make sure that you've got the right assortment on your website, but just as importantly, that, that assortment fits comfortably on the shelf because you want your first-time pick rate to be really good and you need that to be efficient. So the team that are doing center of store need to make sure that the planograms are where we need them to be. So my comment around we need to think carefully is based on sort of 3 to 4 days out in stores where at times, we're probably trying to put 4 pounds of sugar in a 2-pound bag and it makes it a bit difficult to get all that assortment on the shelf comfortably. That in turn means that your top shelf comes under a bit of pressure. In turn, that makes picking for online grocery a bit harder. The associates find it a bit more difficult. There's a bit more stock sitting in the back room.

So it all starts to become the sort of virtuous loop. And part of what we're starting to think about now is how we go about getting to a situation where you optimize the individual components, but really what you're doing is that you're optimizing the total ecosystem. And that requires everyone to play together in a team and do that quickly. So that's the sort of thing that we're now thinking about. Lots of detail that I could put into that because I haven't even spoken about what does that mean in terms of promotions, and you heard from Ron and David that there's some complexity around that. And I've picked that up just already in the 20-odd days that I have been around the place. So we've got to think about how we gradually take this Boeing 787 at 42,000 feet and just glide path it in and keep everyone on an even keel and land this plane safely. But the objective is to do that and to win. We didn't come and invest in all this so that we can come second. So that's on my mind as well.

I will wrap up, if that's okay. Thank you all for the questions. And just as I close, I would like to share a few comments with our associates listening in. I have spent time visiting stores, as some of you have seen, also distribution centers and a manufacturing facility and of course, getting around our offices. And I just want to tell you that I've seen the energy and the pride that all of you are bringing to work every day.

So from the associates stocking our shelves and helping customers to the teams in our supply chain support centers, keeping this business running, you are what make Kroger great. So thank you for what you do. I'm incredibly excited to be on this team, and I'm looking forward to getting out and visiting more locations and meeting more of you in the weeks ahead. Thank you, everybody, for joining us on this call this morning.

Thank you all for joining today's call. You may now disconnect your lines.

Good morning, and welcome to the Kroger Co Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Rob Quast, Vice President, Investor Relations. Please go ahead.

Good morning. Thank you for joining us for Kroger's Third Quarter 2025 Earnings Call. I am joined today by Kroger's Chairman and Chief Executive Officer, Ron Sargent, and Chief Financial Officer, David Kennerley. Before we begin, I want to remind you that today's discussions will include forward-looking statements. We want to caution you that such statements are predictions, and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger Company assumes no obligation to update that information. After our prepared remarks, we look forward to taking your questions. In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to 1 question and 1 follow-up question, if necessary.

I will now turn the call over to Ron.

Thank you, Rob, and good morning, everybody. Thank you for joining our call today. We're happy to deliver another quarter of strong results, reflecting meaningful progress on our strategic priorities. This quarter, we continue to focus on what matters most, serving our customers, running great stores and strengthening our core business. These efforts are improving the customer experience and creating a strong foundation for long-term growth.

Today, we're going to talk about the things we got done this quarter, the proof points of our progress and the ways we're positioning Kroger for continued success. I'd like to start with sharing the results of our e-commerce strategic review. It marks an important step in how we're evolving our business to meet customer needs and also to improve profitability.

In today's world, having a strong e-commerce offering is key to delivering a differentiated customer experience and also represents an important growth driver for our business. We've made good progress, building a more than $14 billion business and achieving 6 consecutive quarters of double-digit sales growth. Earlier this year, we formed our new e-commerce team headed by Yael Cosset designed to align all of the teams who contribute to the online customer experience.

By bringing these teams together, we've created a more integrated structure to support our strategy. Building on that foundation, we conducted a comprehensive review of our entire e-commerce model. This review helped us to identify where we can be more efficient and better meet customer demand.

Customers increasingly value speed, flexibility and convenience and better leveraging store-based fulfillment helps us meet those expectations. As a result, we're evolving our hybrid fulfillment model by using automated fulfillment in geographies where customer demand supports it and also leveraging store-based fulfillment through our pickup business and relationships with well-established third-party delivery partners. These changes are fully consistent with our broader organizational goals to improve operational efficiency, to drive profitability and to more effectively utilize our stores.

We will make these changes to our network through a phased approach, ensuring we maintain flexibility to adjust our plans while minimizing operational and customer disruption. In recognition of this shift, we announced the closure of 3 automated fulfillment centers that haven't met operational and financial expectations. We expect these fulfillment centers to close by the end of January 2026. Based on our customer and store level analysis, in those geographies where we will close sites but continue to operate stores, we expect to retain most of our customers and their e-commerce spend through store-based fulfillment and in-store shopping.

We expect these closures to have a neutral impact on identical sales without fuel. With more fulfillment occurring in stores, we recently expanded our relationships with third-party delivery providers, Instacart, DoorDash and Uber Eats. By using our store network, we're improving both geographic coverage and speed with delivery in as little as 30 minutes. Each of our delivery partners brings unique strengths and specific benefits to our customers. They will also create new opportunities for our media business, both on our platform and on theirs, something David will cover later.

So in summary, this refreshed hybrid model helps us to attract new customers, improve delivery speeds and leverages our growing store network. We expect these decisions to contribute approximately $400 million in e-commerce profitability improvements in 2026, making our e-commerce business profitable in 2026.

Turning now to store operations, running great stores and delivering an exceptional customer experience are central to our strategy. Our internal composite scores, which measure key metrics such as in-stocks, fresh quality and customer service continue to show steady improvement. We're also investing in experiences that matter most to our customers, including adding store hours to improve checkout speed, increase service and improve in-stocks.

These investments are delivering tangible results, including significant year-over-year reductions in wait times for our customers. To support these changes, we're utilizing an AI-powered workforce management platform, which enables better coverage during peak periods and gives associates greater flexibility. This tool combines real-time labor insights with intelligent scheduling, allowing store leaders to proactively fill open shifts and ensure the right staffing at the right time, especially during high demand periods like weekends and holidays.

Finally, as part of our commitment to simplifying our business, we are making good progress in reviewing all noncore assets to determine their ongoing contribution and role within the company. All of these actions strengthen our business and position Kroger for long-term growth.

Before I talk about the results, I want to take a moment to just share what we're seeing from customers and how that's shaping our approach going forward. Macroeconomic uncertainty continues to influence customer behavior, and we're seeing a split across income groups. Spending from higher income households continue strong, while middle income customers are feeling increased pressure similar to what we've seen from lower income households over the past several quarters. They're making smaller, more frequent trips to manage budgets and they are cutting back on discretionary purchases.

Food spend has been more resilient than nonfood spend. Categories like natural and organics continue to perform well, reflecting continued interest in healthy and premium options. At the same time, customers are turning to promotions and our brands as smart ways to save without sacrificing quality.

Ready-to-eat and other meal solutions are providing another way for households to get quality and convenience at a great value. Inflation and uncertainty around government funding combined with the pause in SNAP benefits during the final weeks of the quarter, added incremental pressure to our third quarter identical sales without fuel. These trends reinforce the importance of delivering value through lower prices, affordable quality in our brands products and more promotions for customers to save.

Turning to our third quarter results. Identical sales without fuel grew 2.6% year-over-year and accelerated on a 2-year stack basis, up 4.9%. Sales growth was led by pharmacy and e-commerce. Gaining market share continues to be a top priority. In a challenging macroeconomic environment, we delivered share trend improvement again this quarter after adjusting for closed stores, reflecting the progress we're making in strengthening our competitive position. We also increased our price investments this quarter.

Toward the end of the quarter, when SNAP benefits were held up, we increased promotions to help customers save. We are disciplined in those investments, balancing our gross margin rate to ensure we deliver value in a sustainable way. Our brands had another strong quarter with sales outpacing national brands. Customers continue to choose these products because they deliver high quality at a great value.

Our premium lines, Simple Truth and Private Selection were the strongest performers again this quarter. Our brands products carry a more favorable margin profile and also improved profitability during the quarter. These results highlight the strategic importance of our brands, driving sales, building loyalty, and improving profitability.

E-commerce sales were strong again this quarter, growing 17%, led by delivery. We also improved e-com profitability with both pickup and delivery showing strong quarter-over-quarter improvement. We're encouraged by the early results from our DoorDash relationship in its first month alone, we fulfilled 1 million orders, bringing new customers and incremental meal occasions to Kroger. As we evolve our hybrid model, we expect to continue to ramp up both sales and profitability. This quarter's results show the progress we're making. We also know we have more to do. Looking toward the future, as we've shared previously, we're accelerating expansion of our store footprint.

We expect to break ground on 14 new stores in the fourth quarter, marking a meaningful acceleration in activity. Earlier this quarter, we announced expansion plans for Harris Teeter, one of our strongest and most successful banners. These plans include opening additional new stores in the Southeast and entering Jacksonville, Florida, which is an important adjacent geography that positions us to grow households and gain share.

Looking ahead, we plan to accelerate capital investment in new stores beyond 2025 to strengthen our competitive position, expand into high-potential geographies and support long-term growth. As we expand our footprint, our approach to site selection and store format starts with the customer, then prioritizes improving ROIC with a focus on delivering greater shareholder value. We also see significant opportunity to continue taking costs out of our business, starting with procurement, both cost of goods sold and goods not for resale are areas with significant potential for savings, and we are acting to capture those benefits.

At the same time, we are rethinking how we work. This includes leveraging technology and artificial intelligence to simplify tasks and operate more efficiently, putting talent closer to the customer and building a more streamlined organization. As part of this effort, we are returning to in-office work 5 days a week to strengthen collaboration, accelerate decision-making and better support our stores.

Working together also creates a better environment for our associates to learn and develop. These changes will allow us to move faster and lead to a more efficient organization. We're also looking to emerging technologies, such as Agentic AI to enhance the customer experience. We plan to introduce new Agentic shopping capabilities, starting with Instacart's AI-powered card assistant on the Kroger website and mobile app in the first quarter of 2026.

The card assistant will help customers shop more effortlessly by making it easier to build personalized baskets, find meal ideas and save time. We'll embrace this technology while making sure it complements what differentiates Kroger today, fresh products, unique our brands products and an industry-leading loyalty program. While the landscape continues to evolve, we're confident we'll be able to use technology to improve the customer experience.

Finally, we're continuing the foundational work towards refreshing our go-to-market strategy with the customer of the future in mind. This includes a deep dive into customer data and a rigorous assessment of our competitive positioning. This work is shaping the foundation for our next phase of growth.

Now I'll turn it over to David, who will review our financial results in more detail. David?

Thank you, Ron, and good morning, everyone. Kroger delivered another strong set of results this quarter, driven by solid execution in our core grocery business and continued growth in e-commerce and pharmacy. In a challenging environment, marked with cautious consumer spending, the government shutdown and a pause in Snap distributions we improved market share trends, excluding the impact of store closures by delivering meaningful value for customers. We delivered these results while continuing to balance the right investments for the customer with disciplined margin management.

I'll now walk through our financial results for the third quarter. We achieved identical sales without fuel growth of 2.6% moderating slightly from last quarter as we cycle the impact of last year's hurricane Helen and Port strike as well as the pause in Snap distributions during our final week of the quarter. On a 2-year stack basis, identical sales without fuel accelerated by 20 basis points to 4.9%, reflecting continued strength in our business.

Our identical sales without fuel growth was again led by strong pharmacy and e-commerce results. Food inflation increased moderately compared to the prior quarter with notable inflation in certain commodities, particularly beef. Our pharmacy business delivered another strong quarter fueled by growth in both core pharmacy scripts and GLP-1s. While the strong growth in pharmacy sales impacts our margin rates, it contributes positive gross profit dollar growth and supports our overall operating profit.

Our FIFO gross margin rate, excluding rent, depreciation and amortization and fuel increased 49 basis points in the third quarter compared to the same period last year. The improvement in rate was primarily attributable to the sale of Kroger Specialty Pharmacy, our brands performance, lower supply chain costs and lower shrink partially offset by the mix effect from growth in pharmacy sales, which has lower margins and price investments.

After excluding the effect from the sale of Kroger Specialty Pharmacy our FIFO gross margin rate increased 24 basis points. As we communicated last quarter, we expect our gross margin rate for the full year on an underlying basis to be relatively flat as we balance the impact of pharmacy mix margin enhancement initiatives and price investments. The operating, general and administrative rate, excluding fuel and adjustment items, increased 27 basis points in the third quarter compared to the same period last year. The increase in rate was primarily attributable to the sale of Kroger Specialty Pharmacy and investments in associate wages and benefits, partially offset by lower incentive plan costs and improved productivity.

After adjusting for the sale of Kroger Specialty Pharmacy, our adjusted OG&A rate increased 9 basis points on an underlying basis. As we did in the first quarter this year, we took the opportunity to make an accelerated pension contribution in Q3, which was worth 8 basis points on our OG&A rate. This reflects a proactive approach to reducing future liabilities and most importantly, help secure long-term benefits for our associates.

Our LIFO charge for the quarter was $44 million, compared to a LIFO charge of $4 million last year, resulting in a $0.04 headwind to EPS this quarter. Our adjusted FIFO operating profit in the quarter was $1.1 billion, and adjusted EPS was $1.05, both reflecting 7% growth compared to last year. Fuel is an important part of Kroger's strategy and builds loyalty with customers through our Kroger Plus fuel rewards program. Fuel sales were lower this quarter compared to last year, attributable to fewer gallons sold. Fuel profitability was in line with expectations, just slightly ahead of the same period last year. We expect gallons sold to remain lower on a year-over-year basis for the fourth quarter.

Turning now to e-commerce. Our e-commerce business delivered 17% growth this quarter, driven by an increase in both households and order frequency. Orders delivered within 2 hours or less, grew by more than 30%, reflecting the growing media [indiscernible] demand. Building on what Ron shared earlier, the recent update to our e-commerce strategy reflects a thoughtful evolution of how we serve our customers and drive sustainable growth.

Our refreshed hybrid fulfillment model allows us to leverage the strength of both automation and store-based fulfillment to meet evolving customer expectations. This also allows us to optimize the performance and use of automated fulfillment centers when the right conditions exist and utilize third-party partners for faster delivery while reaching new customers and incremental trips. Our new model positions us for both strong, sustainable growth and improved flexibility.

From a financial perspective, we're significantly accelerating the profitability of our e-commerce business. closing 3 fulfillment centers and increasing store-based delivery will deliver approximately $400 million in incremental e-commerce operating profit in 2026. As a result, we now expect our e-commerce business to be profitable in 2026. The benefits from these decisions will be primarily used to reinvest in our business to increase value for customers and improve the shopping experience as we look to accelerate sales. We also remain focused on expanding operating margins and a portion of these benefits will be used to increase shareholder value. Given the financial performance of our automated fulfillment network and the closure of specific sites and as previously announced, we recorded an impairment and related charges of $2.6 billion in the third quarter.

We will continue to monitor our retained sites with a focus on improving operating efficiency and strengthening financial performance. Our updated hybrid model also creates new opportunities for our media business. Our broad reach and unmatched food retail capabilities are attractive to delivery partners and we structured these relationships to benefit our media business. For example, our unique approach to collaboration with Instacart, DoorDash and Uber unlocks new media opportunities across both platforms and we're already seeing strong interest from several large CPG brands.

By integrating our customer data and loyalty insights with third-party platforms, we can bring more targeted and innovative media campaigns to reach new customer segments and create additional monetization opportunities. Our media business had a strong quarter with double-digit growth and continues to be a meaningful contributor to profitability. We're encouraged by the momentum and believe we have an opportunity to accelerate growth even further as we leverage new capabilities and improved coordination between our media and merchandising teams.

I'd now like to turn to capital allocation and financial strategy. Kroger delivered strong adjusted free cash flow this quarter, which reflects the strength of our operating performance. Free cash flow is important to our model, providing liquidity for our operations and strengthening our balance sheet. At quarter end, our net total debt to adjusted EBITDA ratio was 1.73%, which is below our target ratio range of 2.3% to 2.5%. This provides us with financial flexibility to pursue growth investments and other opportunities to enhance shareholder value. We expect to return to our target leverage ratio over time and we'll share more details about our plans for 2026 next quarter.

Our capital allocation priorities remain consistent and are designed to deliver total shareholder return of 8% to 11% over time. We are focused on investing in projects that will maximize return on invested capital over time while remaining committed to maintaining our current investment-grade rating, growing our dividend, subject to Board approval, and returning excess capital to shareholders. During the third quarter, we completed our $5 billion ASR program under Kroger's $7.5 billion share repurchase authorization. We are currently executing open market repurchases and expect to complete the remaining $2.5 billion under the authorization by the end of the fiscal year, which is contemplated in full year guidance.

Improving ROIC is a key priority. As we shared earlier, we expect our updated hybrid e-commerce model and investments in new storing to drive stronger returns going forward. Building on that, we continue to sharpen our focus on cost structure. We've made meaningful progress so far, but we see greater opportunities ahead by modernizing operations and ways of working across our organization, from stores to support centers. We also see opportunities to improve procurement to unlock additional cost savings. The combination of disciplined cost management and capital deployment positions Kroger to deliver stronger returns and create more shareholder value.

I would now like to provide some additional detail on our outlook for the rest of the year. We are pleased with the continued momentum in our business, supported by strong performances in pharmacy and e-commerce. Given our year-to-date results and outlook for the remainder of the year, we are narrowing our range for identical sales without fuel growth to a new range of 2.8% to 3% and raising the lower end of our adjusted earnings per share guidance to a new range of $4.75 to $4.80.

This includes the impact of LIFO which is now expected to be a $0.07 headwind compared to what we expected at the start of the year. As we move into Q4, we expect a slight improvement in our OG&A rate to help mitigate the impact of a slight decline in FIFO gross margin rate. One additional factor to note is the impact of the inflation Reduction Act on our pharmacy business. Beginning on January 1, this legislation is expected to reduce Medicare drug prices on 10 highly utilized medications.

Sales on these medications will be recorded at the new reduced prices. Kroger will continue purchasing these drugs at current acquisition costs and manufacturers will fully reimburse Kroger for the difference through rebates, which will then be recorded as an offset to cost of goods sold. As a result, we expect that this will lower Q4 identical sales without fuel by approximately 30 to 40 basis points, but will have no impact on our earnings. This is reflected in our updated guidance.

I will now turn the call back to Ron.

Thank you, David. In closing, we're encouraged by the progress we're making. Our priorities are clear and we're executing with greater speed and discipline. We're strengthening our core business and investing in areas that will contribute to long-term growth. We're taking decisive actions today that will make Kroger stronger now and in the future and deliver greater value for our shareholders over time.

Before we move into Q&A, I want to provide a brief update on the CEO search. Our Board remains actively engaged and is making good progress. While we don't have a specific time line to announce today, we're engaged in a thorough process and expect to appoint a new CEO during the first quarter of 2026.

We'll now open it up for questions.

[Operator Instructions] The first question goes to John Heinbockel of Guggenheim.

Ron, can you talk to -- the accelerated storing program, right? Maybe talk about that cadence. And then when you think about, you've got obviously a fairly far-flung network. How do you think about concentrating that -- and as part of this -- I know the digital review is different. When you think about the portfolio that you currently have, is there -- are there opportunities? Are you looking to -- do you exit some places? Do you double down in others as part of the storing effort?

Sure. Let me kind of try to answer several of those questions. First of all, we're pretty excited about kind of the new investments in storing because that drives a lot of goodness from the top line and the same-store sales line. And we think we've got a great long runway to grow stores. I think when you think about the things that go into making stores successful, obviously, the right location, the right market, you've got to have great operational infrastructure as well as talent.

And obviously, you're not going to open a store unless you think it's going to deliver a terrific return. In the fourth quarter, we're going to complete about -- or in the fourth quarter, we plan to complete about 4 major store projects. We're going to break ground on another 14 stores. And when you look at 2026, we expect to increase new store builds by 30%. In terms of -- and I guess the other thing I should just mention is how excited we are about our entry into Jacksonville with Harris Teeter.

Harris Teeter runs a great business. They already operate in Florida in Amelia Island, which is about 40 miles from Jacksonville, Florida itself is a large state. It's a growing state, we expect to do very well there. I think Jacksonville is the tenth largest city in the United States, and I think it's the largest city in Florida. And I think that's kind of an indication of we're going to continue to expand in adjacent markets. I think we also have opportunities to grow through acquisition, and we haven't ruled that out despite our last few years with Albertsons. And I think when you look at our long-term aspiration, we expect and plan to be a national retailer.

So I'm not sure that answers all your questions. Concentration is important. We'll certainly fill up Jacksonville before we move to adjacent markets. But we think we've got great opportunities to grow stores. And I think, frankly, that's been one of our biggest challenges over the last few years is we haven't allocated enough capital to growing stores because we have allocated a lot of capital in other areas like fulfillment centers.

Great. And maybe just a follow-up, totally unrelated. The CEO search has been one of the longest, right? I think we've seen it in a while. I'm curious, you and the Board, what are you looking for? Maybe characteristic-wise, capability-wise. And what does the business need from that person?

Sure, yes. I think as you know, we've been pretty deliberate in the process. We've also been very thorough in the process. We're working with an executive search firm and we have identified and engaged with really several very highly qualified candidates. I think we have announced publicly that our next CEO will be external. And I think we expect them to bring in fresh perspectives to the organization and also to complement the culture that we have today, which is pretty strong at Kroger as well.

In terms of what we're looking for, we want a deep understanding of retail transformation. We want somebody who is very close to the customer. We want somebody who has demonstrated success operating at scale, who knows how to operate and frankly, cultural fit and an alignment with Kroger values is critical as well. And like I said, we're getting closer. We're making good progress, and we expect that decision will be announced in the first quarter.

Next question go to Ed Kelly of Wells Fargo.

I wanted to -- maybe first, Ron, could you just kind of step back and maybe talk about how you're feeling about the current grocery ID trend? It seems like you want that to be better. The competitive environment, it seems like it may be picking up a bit. And you did mention some investment in price towards the end of the quarter. How should we think about all of that in the context of maintaining underlying gross margin stability going forward. And I think what you are implying for next year based upon what you're talking about e-com is EBIT, at least maybe some EBIT margin expansion.

Sure. Yes. Let me just talk a little bit about sales. I think this morning, we announced that sales came in a little lighter than we expected, and that was primarily later in the quarter. And that's due to a combination of factors. We saw increased caution and uncertainty among consumers, particularly in October and November due to the concerns about the government shutdown. Also the pause in SNAP benefit distributions created some headwinds at the end of the quarter. I think consumers are becoming more selective. They're buying more on promotion. They're reducing the discretionary purchases, things like general merchandise, general merchandise comped negative during the quarter.

And also, we had a tougher ID comparison in Q3 from the prior year. Despite all that, our 2-year stacked identical sales were up 20 basis points, and I think that might have been one of the higher quarters of the year. But I think what we're doing going forward is our focus remains on value and serving customers during a pretty uncertain time. If you look at Q4, well Q4 to date, we're feeling pretty good about our quarter-to-date sales. We're slightly ahead of our guidance that we provided this morning. But we don't anticipate any meaningful improvement in the consumer environment in Q4.

Also, when you do the math, looking at the top line, we're also going to lap harder comparisons in Q4. Last year, we benefited from some weather and maybe we'll have weather again this year. Also, we benefited from egg inflation last year that we won't see this year. And then finally, and I think David mentioned this one is we'll see some headwinds relating to the inflation Reduction Act in pharmacy, and that will hit us in January to the tune of about 30 basis points in overall ID sales. You asked about competition. I think the environment remains very competitive as it always is in the retail world.

I think especially true today when consumers are looking for great value. Frankly, our focus is just running the Kroger playbook -- we want to run great stores. We want to drive e-commerce business. We want to grow alternative profits. We continue to lower prices. We took down another 1,000 items in Q3 and I think we will continue to ramp up promotions during the holidays to drive traffic as well as basket sizes. The good news is that vendor funding continues to be strong to support our initiatives.

Maybe I'll give you one example of that on the Thanksgiving meal bundle that we announced a few weeks ago. We lowered the price this year over last year. And we did not cut the menu to do so. I think the bundle fed 10 people for less than $5 per person. So in answer to your question, yes, the environment remains competitive, and we expect that to continue.

Just a couple of things to build on Ron's comments. I think also important to note that in the quarter, our share trends improved. So despite the impact on sales from the things that Ron talked about, we saw sequential improvement in our share trends, which was good. And then in terms of gross margin, I think Q3 shows that we manage gross margin in a very, very responsible way. And I think despite what we've guided to for Q4, you guys should think about us continuing to do that in a responsible way. If you look at actually the breakdown of gross margin, selling gross itself actually declined as we invested in pricing, but we were able to offset that with mix on our brands, good sourcing improvements, shrink and other supply chain costs. And I think I'd expect a similar dynamic to what we saw in Q3 going forward.

The next question goes to Michael Montani of Evercore ISI.

Yes. I guess one thing that I was going to ask about was when you look at the pharmacy drug pricing headwind, should we anticipate that, that annualizes closer to 100 bps for next year? That was part one. And then part 2 is just -- can you parse out some of the tailwinds you might have to offset when you think about Express Scripts impact? Where is that now? How does that mature DoorDash and Uber Eats.

Just trying to see what there might be there as offsets.

Thanks for the question. It's David here. So obviously, we're not getting into 2026 guidance today. We'll obviously get into more details on that in our next quarterly earnings. But let me just add a little bit more color on the inflation reduction impacts that we'll see this quarter? And then how you might think about some of the tailwinds that we've got.

So I think to provide a little bit more detail. So starting January 1, Medicare will pay 60% to 70% less for the first 10 negotiated drugs. And I think important to stress that this is really only Medicare. Those lower reimbursements will translate into lower sales, i.e., the price at which we sell and that creates the headwind that we've talked about. I think also important to note that manufacturers will offer rebates to us to offset that -- so this will have no margin impact in the quarter and no earnings impact, and we expect that dynamic to continue on an ongoing basis. As we think about the tailwinds that we have, to maintain really good performance in our ID sales.

Our long-term trends are -- we're seeing units improve in our core business. We've got expecting to continue to invest in making sure our price gaps. We've got headroom on our brands, we've got, I think, a whole range of different initiatives to keep core momentum in our business moving along strongly to offset some of the impacts from what we're going to see going forward on our pharmacy business.

The next question goes to Kelly Bania of BMO.

Can you just maybe help parse out more specifically the impact of pharmacy on the quarter? It sounds like you're estimating some slight market share improvements. But I think a lot of investors are really just trying to understand what's happening with the core grocery business with inflation and units and market share? Any color you can give there? And then also just going back to the the reinvestment of the e-commerce losses. Maybe can you talk about how much you're planning there? How much is planning to go towards price versus store standards and maybe just your assessment of those 2 key factors on where your price positioning is and your store standards?

Is this going to be a broad-based investment across many stores, more targeted in certain areas? Any color on how we should think about that and what that might do for next year.

Kelly, let me take that initially, and then I'll turn it over to Ron. So I think pharmacy in the quarter I would think of the impact of pharmacy business similar to what we've been seeing over recent quarters. So I don't think there's a material change in what we've seen from a pharmacy performance this quarter.

I think your second question was around units and what we're seeing on the core business. We did see a slight deceleration in our unit trends in Q3 if you sort of dissect where that's coming from, actually discretionary categories were probably the most impacted. We also saw some impacts in our meat business due to the higher inflation that we've been seeing. But I think it's also important to say that actually unit trends improved or held up in a number of areas.

We saw good improvement in the deli. And actually, natural and organic foods held up really, really well. I think these trends changed given some of the broader dynamics that Ron talked about at the beginning, snap and the sort of broader macro consumer environment.

In terms of the tailwind that we have next year from our e-commerce business, we haven't yet declared how we're going to split that money up. Obviously, we'll provide more details when we get into 2026 guidance. But as we've said, we expect to use some of the money to reinvest back into pricing to make ourselves even more competitive. We've got a whole range of different opportunities to invest to improve the customer and in-store experience, which we believe will also help improve composite scores but we're also committed on an ongoing basis, as we've said, to improve the operating margins of the business, and we expect to do that next year as well.

And David, the only area I would add would be kind of technology. I think we've got some technology spend that is in the pipeline that we want to make sure that we can continue to grow not only our retail business but also our e-commerce business, which is rapidly evolving.

The next question goes to Michael Lasser of UBS.

Two-part unrelated questions. The first is, as you went through your e-commerce review, how did you think about the risk of leaning so heavily on third-party providers to fulfill a core competency, which is to interact with the customer at the point of delivery versus having that function more in-house? And also, as part of the e-commerce review, you mentioned that it's going to be profitable next year.

Is that simply a function of the $400 million of losses going away? Or are there other factors that we should consider to drive that profitability? And just one last unrelated point. As you think about 2026, do you expect the rate of growth for the grocery industry just to be more sluggish overall, given this 100 basis point headwind from the pharmacy change along with what could be a headwind from MAX next year?

Sure. I'll start, and then I'll turn it over to David. In terms of -- you asked the question about the providers that are going to be doing some more of our delivery one, we're really excited about the connection. I think each of those partners really brings distinct customer -- serve distinct customer needs as well as occasions. Some are full basket stock up delivery companies and some are really more about immediate convenience. I think we're looking at these incremental -- as these partners as incremental sales opportunities and customer opportunities. The vast majority of our e-com sales come from the Kroger website. And we feel like they give us operational flexibility as well as strategic flexibility.

If you think about Instacart, which is our largest partner, they deliver broad geographic reach. They've got great scale. They can handle very large basket sizes. They also -- we also can offer a genetic shopping capability on Kroger's iOS platform. Uber Eats that leverages Uber's existing customer base and the Uber app. And I think the benefits here are add-on economics, customers can order grocery items and do with the restaurant orders. And that certainly appeals to younger customers who want more speed, more convenience. And I think those are -- represent new and younger customers for the company.

And then DoorDash, David talked about how successful that launch has been. And there, again, we're focusing on speed. We're focusing on convenience. It is ideal for quick small basket needs and again, it appeals to younger customers. In terms of the $400 million, I'll ask David to weigh in on that one.

Yes. So Michael, the way I think about e-commerce profitability is I mean, as we've been saying, we're already making good improvements in profitability on the business that as it exists today. In fact, in a we actually cut the losses that we've been making in half. So we're making really, really good quarter-over-quarter improvements in profitability, and I expect that to continue into next year. You then take the $400 million that we've talked about, which is from closing the automated fulfillment centers.

You then add in the business that we believe is highly incremental from the new third parties that we're working with, so DoorDash and Uber Eats as well as continued growth from our Instacart business. You've got the media business that we expect to continue to grow. And importantly, the media sharing opportunities that we have with our new partners and when you put all that together, that allows us to expect that we will make money in e-commerce next year.

And Michael, your third question. I'm not sure I'm qualified to speak for the rate of the grocery industry growth rate for 2026. And I certainly don't want to get into any guidance at this point. We'll do that next quarter. But I don't know that there's any reason why there should be this dramatic slowdown in the grocery industry. And certainly, not for us, we've got new store growth coming -- we're closing kind of unproductive and low-performing stores.

E-commerce has been -- has had a great year and continues to accelerate. It seems like every month more and more -- so the mix might change a bit there because e-commerce will grow faster than physical stores. But we've got a lot going on in fresh categories. Our brands continues to grow faster than the house. And then finally, we want to continue to execute very well in our stores and customer service matters. And I'm not sure that I see a slowdown for 2026.

The next question goes to Jacob Akin Phillips of Melius Research.

So on the last call, you talked about how you're kind of working on how you discuss the Retail Media business with vendors or across the organization. And today, you highlighted some new opportunities with the 3 partnerships. I'm just curious like as more emissions originate on the partner platforms.

How are you structuring the relationship so that you have the right level of first [indiscernible] data? And should we think of the economics as comparable first party res third party for Retail Media?

Jacob, let me take that one. It was a little hard to hear your question, your line is breaking up. But hopefully, I got the gist of it. So -- we're seeing good performance from our Retail Media business today. So in Q3, we saw another quarter of double-digit growth, and we think we've got good plans for Q4 and our plans lead us to believe actually that that business will accelerate into Q4.

And obviously, we'll share more specific guidance as we get into next year. And I think the foundation of this is great tools with best-in-class capabilities for the brands that choose to operate on the platforms. Now as we think about the new partnerships that we've got going forward, the really important thing that was important for us as we structured those relationships is to make sure that we got to participate in the media opportunities that exist and that may originate on their platform rather than our platform.

Obviously, I don't want to get into the details of the specifics of how we structured those agreements but we've structured them in a way that we benefit what I would call appropriately from that in a way that's very favorable to our economics.

The next question go to Seth Sigman of Barclays.

I think there was a comment that you feel good about quarter to date. I'm not sure if that implies trends have improved or not. But is there anything more you can share about that and what may be driving that if it is improving? And you mentioned price investments. I'm just curious, is that playing a role and then a bigger picture question on price investments.

You were doing a lot of testing this year. Is there anything else you can share about what is working versus what is not working?

Yes. I think it's a little early to kind of opine about the fourth quarter. We're just 3 or 4 weeks into the quarter. Just to be clear, I said that quarter-to-date, we are trending ahead of our guidance that we shared with you this morning. In terms of price investments, it's a little hard to know those in real time. We continue to make price investments. We will continue to do that throughout the quarter.

I think what we're seeing with our promotional kind of environment out there is that customers are responding to promotion and we will continue to do that. I don't know, David?

Yes. Just sorry, 1 slide clarification just to make sure the point on Q4 is crystal clear, we're trending quarter-to-date, slightly above the midpoint of our Q4 guidance.

I think there was a second question on there, Seth, about price investments. Listen, we continue to make sure that we offer great value for the consumer. As Ron talked about, a great example was towards the end of the quarter when we knew consumers were struggling given SNAP benefits being withheld, we invested in what we believe was an appropriate way and also a very responsible way with our margins to bring the cost of the Thanksgiving dinner down as well as lower prices through promotions on a number of critical items for households.

And I think -- we'll continue to do that. Value is at the foundation of what we do, and we'll continue to do that in a responsible way.

The next question goes to Simeon Gutman of Morgan Stanley.

Two questions. The first, e-commerce, now that you'll be in the green next year, can you talk about the scalability or maybe incremental margins? Does it move quicker or it's still a long evolution and part 2, since you've been in your role Ron, there's been some significant change, strategic change, tactical change.

Today's call sounded a little more urgent with some pricing folks coming back to work, et cetera. I don't know if that's a fair read or not. Can you say if it is? And I guess new CEO should be very little interruption as far as execution goes because it sounds like the plans are all being built today.

Let me ask David to cover the first and then I'll cover the second.

Yes, let me take the first one. So obviously, the economics are very commerce business with the outcome of the strategic review have changed. So we now move from a business that was in the red to a business that's now in the green. We've had a really good growing business now for many quarters. And I think with the new partnerships that we've signed with the stores that we're building with the strong growth that we're really seeing across all elements of our e-commerce business.

I think what that allows us to do is continue to scale the business in a way that we now make money. So I think as you think about that going forward, I'm not sure we see a dramatic change in the growth rate. but I'd expect us to see continued strong double-digit growth from the e-commerce business going forward with the change being that, that business is now profitable.

And Simon, just to get into the second point, I've been here. I think this is my tenth month. And my only objective is to set up the company for future success. We got to do the right things, and we're going to do the right things even if some of the decisions are hard. And you ask about urgency. I'm not sure there's any more urgency. I'm always urgent about everything. And I think going fast needs to be a key element of our culture. I think being willing to make the tough decisions needs to be a key part of our culture and to the support we've gotten great support. The board has been very supportive of those things that we need to do to set the company up for future success.

And frankly, our management team has really embraced the speed, the decisions, the focus on the customer, the focus on kind of moving some of the influence from our corporate office to our divisions, where our customers are. And then 5 days a week, it's frankly just a function of the fact that that's just retail. I mean we need to be here. We need to collaborate. We need to be able to respond quickly. And we need to be able to support our stores that operate 7 days a week as long as our -- as well as our manufacturing facilities and our distribution facilities.

So I wouldn't say there's more urgency -- but I would say that there's plenty of urgency.

The next question goes to Thomas Palmer of JPMorgan.

In the release discussing the fulfillment center closures, there was the mention right of the $400 million in savings. Could you maybe get a little bit of a breakdown of where these savings will be seen. I think some of it might be depreciation, some of it other operating costs? And then when we're thinking about the reinvestment -- how much of this is investment that you probably would have undertaken anyway, and this just gives you kind of better AO to fund it versus things that might not have occurred if the closures had not occurred?

Yes, let me take that one. So as you think about the $400 million, you're right that, that splits across what I would call kind of kind of operating profit, kind of EBITDA kind of more cash-related items. And then, of course, there's a component of it relates to depreciation. So it is split across both. In terms of investments, the way I would think about that, obviously, and we'll get more into that in terms of when we get into guidance for next year, it's a combination.

Clearly, it gives us fuel to be able to make investments that we were likely already going to make. But it also gives us incremental flexibility to invest in things that perhaps we were not going to be able to make. So we'll get into more details on that as we get into 2026 guidance, but hopefully, that gives you sufficient color.

And just to add, I mean, the key of e-commerce, it's our -- one of our fastest-growing businesses, and that will continue. In fact, it continues to accelerate. It's 11% of our sales. The focus is we got to make money on a business that's growing that fast. And it was all about we're going to get profitable. We got to get profitable fast because that e-commerce is a key part of our future here.

The next question goes to Rupesh Parikh of Oppenheimer.

So just going back, I guess, just to CapEx. So going forward, more aggressive store openings, obviously, a change in our e-commerce strategy, does anything change in terms of how to think about the baseline CapEx spending for the business?

CapEx.

I don't think anything changes in the immediate term about the CapEx. I think what we're doing is prioritizing the mix differently, so we're reallocating more into our storing program and less into other areas of the business. We think this is good for the ROIC of the company and the returns on our capital as we get good returns from major storing programs. So think of it more as a mix shift.

The final question goes to Karen Koski of North Coast Research.

And looking at your store development -- well, let me back up a bit. It sounds like you talked about the mid-tier customer pulling back some more in line with the lower income customers that a change that you saw during the quarter. and looking at store development, anything going on at Fred Meyer that you might want to talk about? And could you perhaps talk about how it's larger exposure to general merchandise as you're thinking about that banner?

Sure. Yes, I can give you some big picture kind of comments about the what we're seeing on the consumer side, as you've been reading, consumer sentiment has declined a lot over the last 4 months. And there's a lot of reasons behind that, whether it's a slowing job market or the government shutdown, the SNAP benefits, concern about inflation and categories like beef and coffee and chocolate, I just think customers are managing their budgets carefully, and they're making more trips.

They're making smaller trips. The idea of stocking up is declining a bit. And we're seeing this economy where high income premium shoppers, they continue to spend while lower income customers are pulling back more aggressively.

In terms of that middle bucket, I would guess, again, they're also looking for value. And the best indicator of that is our Q3 was softer in the later parts of the quarter because of the pause in SNAP benefits. So that would be kind of -- I think going forward, I think the consumer is going to remain cautious. I think there's going to be more focus on food items and less on discretionary categories.

Does that impact Fred Miner? I think it probably does from their mix of higher mix of discretionary and GM merchandise. But it's also -- we're seeing it in adult beverages, snacks, I think the good news is that we're seeing this continued shift from restaurant purchases to food at home purchases, which should be good for our business.

And then I think the other big trend we're seeing is e-commerce continues to grow a lot faster than physical stores. Fred Meyer, I don't want to point out a specific division, but Fred Meyer continues to perform well. We got Todd out there, President, Todd Cammie, running it. And I was out there a few months ago, and I'm feeling pretty good about Fred Meyer.

I think maybe just one thing just to add on stores and store formats as to how we think about that we'll continue to build kind of large stores around the 123,000 square foot. We've also got a 99,000 square foot format that we're going to continue to build. And I think as we think about the future, we're going to continue to experiment to make sure that we have the right array of store formats to cater consumers wherever they may be located.

That concludes today's question and answer. I will now hand back to Ron Sargent, Chairman and Chief Executive Officer for any closing comments.

Okay. Well, thanks, everybody. Thanks. We had a lot of great questions today. Before we conclude our earnings call, we'd like to share a few comments with our associates who are listening in. The progress we've made and the strong results we share today reflect your hard work and your commitment. This year, we focused on running great stores, delivering a strong customer experience and strengthening our core business really priorities that are essential to our success going forward. Your efforts are creating a strong foundation for Kroger's long-term growth.

We're very proud of what we've accomplished so far, and we're excited for the work ahead. So thanks for everything you do and for your hard work during a really busy holiday season. Thanks, everybody, for joining us on the call this morning. We look forward to speaking with all of you again soon. I hope to see you in our stores, and happy holidays, everybody. Thank you

This now concludes today's call. Thank you all for joining, and you may now disconnect your lines.

Good morning, and welcome to the Kroger Co. Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Rob Quast, Vice President, Investor Relations. Please go ahead.

Good morning. Thank you for joining us for Kroger's Second Quarter 2025 Earnings Call. I am joined today by Kroger's Chairman and Chief Executive Officer, Ron Sargent; and Chief Financial Officer, David Kennerley.

Before we begin, I want to remind you that today's discussions will include forward-looking statements. We want to caution you that such statements are predictions, and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger Company assumes no obligation to update that information. After our prepared remarks, we look forward to taking your questions. In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to one question and one follow-up question, if necessary.

I will now turn the call over to Ron.

Thank you, Rob. Good morning, everyone. Thank you for joining our call today. We're happy to report another quarter of strong results, which demonstrates the clear and measurable progress we're making on our key priorities to simplify the organization, to improve the customer experience and to focus on work that creates the most value. Today, I want to talk about what we've accomplished, the proof points we see in our quarterly results and how our priorities are positioning Kroger for sustained long-term growth.

Over the last several months, we've made good progress to position the company for future success. A key part of that success is a strong leadership team. And during the quarter, we continued to upgrade our team. We promoted a tough division president to lead our brands, one of our key growth initiatives. We hired a new Head of Product sourcing who will help us lower our cost of goods sold and close the gap with the industry's best-in-class. We're welcome to new General Counsel, and we continue to elevate strong retail leaders across the company, including several new division presidents.

As we continue to build our leadership team, we're also looking at our costs, especially those expenses that don't directly support our priorities or deliver value to our shareholders. As we shared last quarter, we've begun closing approximately 60 unprofitable stores. Last month, we also reduced our corporate administrative team by nearly 1,000 associates. While these decisions are difficult, they are also necessary for the company's long-term success.

Additionally, in order to create greater focus and simplify our business, we're reviewing all noncore assets to determine their ongoing contribution and role within the company. And finally, we recently put an issue behind us by reaching a legal settlement with C&S Wholesale Grocers. We are pleased to resolve the claims so that we can remain focused on serving our customers and running great stores.

Our efforts to create greater focus are showing up in today's second quarter results. Identical sales without fuel grew 3.4%, which was ahead of our expectations. This is our sixth consecutive quarter of identical sales without fuel improvement. Sales growth was led by pharmacy e-commerce and fresh categories. We know that fresh products are important to our customers, specifically in meat and produce. These categories continue to outpace center store sales and reflect the growing demand for healthier options. Our sales growth in fresh category shows that we're making strong progress in the categories our customers care most about.

Improving grocery volume is also important to us. We're making strategic price investments, which led to another quarter of sequential improvement. In fact, since the beginning of the year, we've lowered prices on more than 3,500 incremental products across our stores which is improving our price spreads against our major competitors. As we lower prices for our customers, we're committed to doing so in a way that keeps our gross margins stable. We're making our promotions simpler and have continued to reduce complex promotional offers. Additionally, we are making it easier for nondigital customers to take advantage of all the value Kroger offers by reintroducing paper coupons in every store.

Our customers are recognizing these changes, and they're giving us credit for them. We know this because customer price perception improved in nearly every division this quarter, and we saw another quarter of sequential improvement in share. Beyond the price of the shelf, families are also looking for quality and value. Our brands products had another strong quarter with sales growth again outpacing national brands. Our brands offer unique products with high quality and represent a point of differentiation for Kroger. Simple Truth and Private Selection brands again led our growth. Looking ahead, we see our brands as a critical strategic asset, helping us grow sales and build loyalty with customers.

E-commerce. E-commerce also continues to be an important and growing part of our business. Sales were strong in the second quarter with 16% growth led by good performance and delivery. We continue to make progress on improving profitability, and we saw improvements in both pickup and delivery profitability on a quarter-over-quarter basis. E-com remains a top priority for us.

Running great stores is also critical to our future and our store teams are delivering on the basics, being in stock, showing clean and uncluttered isles and making shopping easier for our customers. Our internal composite scores, which track key metrics like in-stock levels, fresh product quality and customer service are showing consistent quarter-over-quarter improvement.

And as we are improving our store and e-commerce shopping experiences, we're also taking meaningful steps to reduce our cost structure. In the second quarter, we were pleased with our OG&A rate improvement, and we'll continue to aggressively look for ways to reduce costs throughout the company. We believe that many cost opportunities remain.

So to summarize, we've made strong progress so far this year, and we also know that we have a lot more work to do. Looking ahead, we're focused on investments that will grow our core business. The first of these is new stores. We're on track to deliver 30 major storing projects in 2025, and we are accelerating new store projects with more efficient layouts and faster construction time lines. In 2026, we expect to increase store openings by 30%, helping us grow both in-store and online sales faster.

While we are growing our physical footprint, we're also modernizing our business to operate more efficiently and serve customers better. Artificial intelligence is one of the key tools to help us get there. Accelerating our AI efforts is a natural step for Kroger given our long history of leadership and data and machine learning. Where we've implemented AI in different parts of the organization, we're seeing results with more competitive pricing, shrink improvements and faster fulfillment, which enables 2-hour pickup for customers.

These are just a few examples of what AI is doing to help us better serve our customers with more and bigger opportunities ahead to both support our associates and improve the customer experience. E-commerce will also continue to have a meaningful and growing impact on our financial results, which is why we announced a thorough strategic review last quarter.

We are progressing with 2 key objectives in mind. First, we will improve the customer experience by using our stores to deliver groceries faster. Stores are our most important asset, and when we use our stores to fulfill online orders, the inventory is closer to customers and the last mile delivery costs are lower. As demand for convenience grows, we can leverage our store footprint to reach new customer segments and expand rapid delivery capabilities without significant capital investments, which leads to our second objective, improving profitability and reducing our cost to serve.

We're examining all aspects of our business to drive greater efficiency, including a full site-by-site analysis of our Kroger automated fulfillment network. Where we have seen strong demand in high-density areas, these facilities deliver better results than those facilities where density is lower and customer adoption has been slower. We continue to evaluate all options across all facilities to improve profitability while continuing to provide a great customer experience. We expect to share an update on our strategic review during the third quarter. We're confident that the outcome of our work will lead to both stronger e-com capabilities and a clear path toward profitability.

Finally, we're starting the foundational work to refresh our go-to-market strategy. This involves a deep dive into customer data and a rigorous assessment of our competitive positioning. This important work will set us up for even stronger performance in the future.

Now I'll turn it over to David, who will review our financial results in more detail. David?

Thank you, Ron, and good morning, everyone. This quarter, Kroger delivered strong results, which reflect continued progress in our core grocery business and robust growth in e-commerce and pharmacy. Momentum in our core grocery business is being driven by improved execution as well as a disciplined approach to price investments. By reducing the complexity of our promotions and investing more in everyday prices, we are sharpening our price perception with customers driving volume improvements while responsibly managing our margins.

I'll now walk through our financial results for the second quarter. We achieved identical sales without fuel growth of 3.4%. Our sales growth was led by strong pharmacy, e-commerce and fresh results. We are encouraged by the continued improvement in grocery volumes, particularly in the perimeter of the store. Food inflation was slightly lower in the second quarter compared to the first quarter but continues to trend in line with our original expectations from the beginning of the year.

Our pharmacy business delivered another strong quarter, driven by core pharmacy scripts and growth in GLP-1s. Although strong growth in pharmacy sales impacts our margin rate, it drives positive gross profit dollar growth and improves our overall operating profit. This quarter, we've been pleased to welcome more ESI customers back into our stores. We continue to expect that the full return of the business will take time and in Q2, ESI had a roughly 15 basis point positive impact on our ID sales.

We continue to keep a close watch on the changing tariff environment. As a domestic food retailer, we expect a smaller impact than some of our competitors. We continue to be proactive to address exposure where we do have it, and our approach remains to raise prices as a last resort to ensure that we keep prices as low as possible for our customers. Tariffs have not had a material impact on our business thus far and as of now, do not expect them to going forward.

Our FIFO gross margin rate, excluding rent, depreciation and amortization, fuel and adjustment items, increased 39 basis points in the second quarter compared to the same period last year. The improvement in rate was primarily attributable to the sale of Kroger Specialty Pharmacy, lower supply chain costs and lower shrink partially offset by the mix effect from growth in pharmacy sales, which has lower margins and price investments.

After excluding the effect from the sale of Kroger Specialty Pharmacy, our FIFO gross margin rate decreased 9 basis points, largely in line with our expectations to remain margin neutral. The slight reduction in our FIFO gross margin rate was primarily due to pharmacy mix with good progress on rate in the rest of the business. We have many levers to improve our gross margin rate over time and we will continue to use those to balance incremental price investments that improve our value perception with customers. We expect our gross margin rate for the full year on an underlying basis to be relatively flat as we balance the impact of pharmacy mix, margin enhancement initiatives and price investments.

The operating, general and administrative rate, excluding fuel and adjustment items, decreased 5 basis points in the second quarter compared to the same period last year. The decrease in rate was primarily attributable to improved productivity and a favorable comparison to prior year, which included certain nonrecurring charges, partially offset by the sale of Kroger Specialty Pharmacy. After adjusting for the effect from the sale of Kroger Specialty Pharmacy, our adjusted OG&A rate significantly improved, decreasing 41 basis points on an underlying basis.

Cost optimization is one of our top priorities and driving productivity has long been a core competency of this company. We will continue to build on that strong track record by identifying new and innovative ways to deliver cost savings across our business, and our teams are actively pursuing opportunities across multiple areas. One of the areas we're prioritizing is sourcing.

We see significant opportunities to optimize our costs across both cost of goods sold and goods not for resale. We also have a significant and continuing opportunity to modernize work across the enterprise, making us more agile and efficient and leading to a more streamlined operating model going forward.

Our adjusted FIFO operating profit in the quarter was $1.1 billion. Adjusted EPS was $1.04, reflecting 12% growth compared to last year and our strongest growth rate since the fourth quarter of 2023. Fuel is an important part of Kroger's strategy and offers an additional way to build loyalty with customers through the fuel rewards in our Kroger Plus program. Fuel sales were lower this quarter compared to last year, attributable to a decrease in the average retail price per gallon, and fewer gallons sold.

Fuel profitability was also behind the same period last year, and we expect gallons sold to remain lower on a year-over-year basis for the remainder of 2025.

Our e-commerce business delivered 16% growth this quarter, driven by an increase in both household and order frequency. This growth was led by delivery with orders fulfilled from both our stores and centralized fulfillment centers. We are seeing a clear trend of customers opting for faster delivery times, an area where we are well positioned based on our conveniently located store network, coupled with our delivery partner, Instacart. Today, we can offer delivery in under 2 hours from 97% of our stores. This capability is resonating with our customers, and we continue to see more orders placed in these short windows. This digital momentum directly fuels our Retail Media business, which had a strong quarter and is a key contributor to profitability.

While we're encouraged by the performance in the quarter, we believe we have an opportunity to meaningfully accelerate our growth. To support this, we're actively reviewing the operating model and how we engage with retail media clients to ensure we are strategically positioned to maximize growth in this area of our business.

I'd like to take a moment to provide a brief update on associate and labor relations. We made significant progress on agreements this quarter, which provides certainty for our associates and our business. In total, we ratified new labor agreements covering approximately 54,000 associates. We continue to meaningfully improve wages and benefits, and we value our strong working relationships with our unions. By working together, we're better able to support associates and improve the experience we provide customers. These collective efforts have helped us build a more stable workforce with improved retention rates, which in turn drives a better customer experience.

I'd now like to turn to capital allocation and financial strategy. Kroger delivered strong adjusted free cash flow this quarter, which reflects the strength of our operating performance. Free cash flow is important to our model, providing liquidity for our operations and strengthening our balance sheet. At quarter end, our net total debt to adjusted EBITDA ratio was 1.63, which is below our target ratio range of 2.3 to 2.5. This provides us with significant financial flexibility to pursue growth investments and other opportunities to enhance shareholder value. We expect to return to our target leverage ratio over time.

Our capital allocation priorities remain consistent and are designed to deliver total shareholder return of 8% to 11% over time. We are focused on investing in projects that will maximize return on invested capital over time while remaining committed to maintaining our current investment-grade rating, growing our dividend, subject to Board approval and returning excess capital to shareholders.

In the second quarter, we raised our quarterly dividend by 9%, reflecting the strength of our free cash flow and our commitment to returning capital to shareholders. Our quarterly dividend has grown at a compounded annual growth rate of 13% since its reinstatement in 2006, and this marked the 19th consecutive year of dividend increases. Dividend increases are just one component of our broader total shareholder return strategy, and we plan to continue returning capital to shareholders through share repurchases.

We expect our $5 billion ESI program to be completed in the third fiscal quarter of 2025. The ESI is being completed under Kroger's $7.5 billion share repurchase authorization. After completion of the ESI program, we expect to resume open market share repurchases under the remaining $2.5 billion authorization. We expect to complete these open market share repurchases by the end of the fiscal year, which is contemplated in full year guidance.

A key priority for Kroger is to improve ROIC, which includes reallocating capital towards higher return projects such as new storing. We are pleased with the progress we are making on these projects and are on track to complete 30 this year. As Ron mentioned earlier, we plan to accelerate these storing projects beyond 2025 and expect them to be an increasing contributor to our growth with a 30% increase expected in 2026, positioning us for sustained expansion and market share growth.

I would now like to provide some additional detail on our outlook for the rest of the year. We are pleased with our second quarter results, which reflect continued momentum in our business. Sales have been strong, led by e-commerce, pharmacy and fresh, and we are encouraged by the improvement in grocery volumes. As a result, we are raising our identical sales without fuel guidance to a new range of 2.7% to 3.4%. For Q3, we expect identical sales without fuel to be slightly below the midpoint of our full year range. We are also raising the lower end of our adjusted FIFO net operating profit and net earnings per diluted share guidance to new ranges of $4.8 billion to $4.9 billion and $4.70 to $4.80, respectively.

I will now turn the call back to Ron.

Thanks, David. The team continues to make progress in running great stores. We are more focused on our core business and our customers. We're moving with speed, and we're simplifying the company. We are executing better in our stores, and we are seeing it in the results both our quarterly financial results and our customer metrics. Our customers are telling us they like lower prices and simpler promotions. They care about quality and value, and they appreciate better store conditions and better service. Our work is far from finished, but I'm proud of the team and the progress they're making.

Before we move into Q&A, I'd like to comment briefly on the CEO search. There is no specific news to share at this time but the Board remains actively engaged in the process. We'll now open it up for questions.

[Operator Instructions] Our first question for today comes from Leah Jordan of Goldman Sachs.

I mean the biggest call out for me that was new is it seems like you plan to use your stores a bit more for e-commerce fulfillment. Can you help us understand how you plan to implement that? Any color on timing and cost how much capacity do you have in your stores today? And then will you have to rework at the back of the stores? And how are you thinking about labor? And I guess, ultimately, how does this balance with your CFC network today as well?

Sure. Let me start with that. I mean we're using our stores very heavily now to fulfill e-commerce orders every day. So it's really not much of a change in that regard. We are taking a hard look at some of our automated facilities. But we had a very strong quarter in both e-commerce sales as well as profitability. And significantly, this quarter was the first time that the delivery sales passed store pickup sales. So I think that indicates that delivery is really important to our customers.

In terms of the strategic review, we're nearly complete. We plan to update you in the third quarter. And to be clear, we feel like e-commerce is incredibly important to our customers. It's also important to our business. We understand that the path to profitability is also equally important. But in terms of reworking stores, there's not much that we need to do. I mean we're doing it now. We're delivering the bulk of our e-commerce is done by stores today, and we adjust volumes all the time. I think new store openings will help us as well. But really not a lot of work. We think it's kind of an asset-light delivery possibility, and it also allows us to get deliveries to customers within a couple of hours time and if they want to pay for it, even earlier than that.

That's very helpful. And then I wanted to switch and ask about price investments. You called out lower prices on, I think, 3,500 products, and that's a step-up from 2,000, I think you said last quarter. And I know you've changed in how you're presenting some of these promotions to be [indiscernible] as well. But just has anything changed in the competitive environment? How do you view your [indiscernible] today? Is that 3,500 the end of the line? And are you still [indiscernible] make these investments in a margin-neutral way at this point?

Yes. Let me answer that one. The competitive backdrop on pricing remains very rational out there. Our priorities currently are to really simplify our pricing strategy. We do want to lower prices. We have done that with the 3,500. We'll continue to do that. Any cost increases, we've tried to absorb them as much as possible. Occasionally, the tariffs will have an impact on some of our pricing.

But pricing in general is very rational. We're going to continue to do it, and we are reducing our spreads versus our competition. We did that in Q2, and I think we'll continue to do that in Q3. But when you look at pricing, we're a different model than some of our competitors, but when you look at promotional pricing we're very, very competitive with everybody out there.

Leah, it's David. Just one more thing to add just on the margins. Obviously, doing this in a responsible way is an important priority for us. we feel we were able to do that in Q2, balancing investments we want to make with a range of cost-saving initiatives, and I'd expect us to be able to continue to do that through the balance of the year.

Our next question comes from Rupesh Parikh of Oppenheimer.

So just going back to your ID sales [indiscernible], now 2 consecutive quarters above 3%. How does your team feel about sustaining close to that level of momentum going forward?

Rupesh, it's David. Let me take that one. I mean we're very happy with the ID sales performance that we've seen so far this year. Good growth from multiple different areas of the business. Obviously, we've updated the guidance range, which obviously we feel confident about our ability to deliver that. I think maybe just the one thing that is important to know is, the first half of the year was definitely our easiest from a year-over-year comparison perspective. So as we get into the back half of the year, the comparisons do get a little harder, that's reflected, obviously, in the guidance. And if you look at the 2-year stacks on our ID sales for the balance of the year, we expect to deliver very healthy and continuing to improve [indiscernible].

Rupesh, the only thing I would add is that I think our customers are responding to simpler promotions, lower prices, better service, cleaner, less cluttered stores. And to also give credit where its due, our merchants and marketing team are offering promotions that customers are responding to. And the divisions and the store associates are executing very well. So we're trying to make less busy work and more customer work.

Great. And then maybe my one follow-up question, just on Retail Media. The comment here appears more positive retail needed this quarter versus recent quarters. So is my understanding correct? And what do you think is driving that improved performance?

Yes. Rupesh, I'd come back to the fact that we've just got a really good offering. I mean we really like the offering that we've got here. We really think it gives the clients that use our retail media assets, the ability to do things that others cannot do. And I think customers are responding to that. So we feel good about the growth that we're seeing. It is a little bit more positive. We did see a slight acceleration in that business this quarter relative to last quarter. We still think this is a very meaningful opportunity for us. We are tweaking some things in the way that we talk to clients about this, which gives us confidence that this can be a continued growth driver for us both in the balance of the year and also into next.

Our next question comes from Simeon Gutman of Morgan Stanley.

So if you take the first to second quarter comp, so it got a little bit better sequentially. And [indiscernible] the slide deck said that the -- there was some sequential improvement in volume. I think it still implies that maybe volume is not positive, but it improved quarter-to-quarter. Can you explain which one moved more? Was it ticket growth or volume growth sequentially? Or was it about the same to get to the 34?

Here's the way I'd try and explain that one. So I think a couple of things. So we saw the kind of inflation number quarter-on-quarter was actually slightly more moderate in the second quarter than we've seen in the first and our units improved. So I think it's pretty balanced, but it was more of a unit improvement than it was an inflation improvement.

And just to kind of add a little color commentary there. Grocery units have certainly improved for the last several quarters. And at this point, we are almost flat year-over-year.

Got it. Okay. And related to that, and then I'll put the follow-up, it sounds like in the back half, even though inflation does look like it's picking up a little bit. It's a comparison, which I think you -- they're tougher by about 100 basis points, why the back half doesn't get even stronger? So that's the follow-up to that question.

The other question, Ron, I wanted to ask. The -- not the e-commerce strategic review, but it sounds like there's a lot of evaluation of everything in the business going on. I wanted to ask about the value proposition. And if there is a debate around the pricing architecture and whether there is a debate around even moving to like a strict EDLP pricing architecture?

Yes. There's no debate about moving to an EDLP pricing architecture. I mean, Kroger is a retailer that for many, many years, has been a promotional retailer. Our customers respond to that. Our customers come to us for that. So I don't think there's going to be a dramatic change. On the other hand, you look at white shelf or white tag shelf prices and you want to narrow that spread on the everyday price items. So I don't think there's a fundamental shift in our pricing strategy, but we're going to be sharper and we're going to be more focused, and we're going to be simpler.

Yes. Let me -- and then let me just, Simeon, come back to the question on ID sales through the balance of the year. Listen, you rightly point out that we cycle stronger results in the second half of the year. I mean, that is a big factor and definitely an important one as we reflected on both our plans for the balance of the year and, of course, where we set the guidance. We feel comfortable about where we've set the range and our priority remains, as we've said, is improving grocery volumes whilst being responsible in the price investments that we're making, managing margins. And that's the delicate balancing act where we've got to continue through the balance of the year.

Our next question comes from Michael Lasser of UBS.

With each passing day, it does seem like you have more and more players across the industry who are looking to the core grocery sector to grab either wallet here or drive other elements of their business and use that as a funding mechanism to harvest other portions of the profit pool across retail, which could put downward pressure on the profit pool within the grocery sector. It seems like your message, Ron, here is listening, we still have a lot of room for internal improvement in repositioning our assets. How much further can you drive improvement from these actions while maintaining a margin rate that's been around 3.1% for the last few years?

Michael, I think the short answer is much further. I mean we've got lots of opportunities to improve our margin rate. I mean I can go through kind of a long list of those, if you would like. But certainly, we've got opportunities on pricing. We've got opportunities on our brands, e-commerce, certainly, sourcing is a big opportunity that we're working really hard on.

I get what you're saying about competitors, but the food industry, it's always competitive in terms of the pricing environment out there. I think our competition continues to be very, very rational. All retailers are dealing with kind of similar issues. And our focus is simplifying and focusing on the things that matter most to our customers.

I don't know, David, do you want to [ add a comment here? ]

Yes, maybe just to reinforce the point about the cost opportunity that we think we have. Michael, we think -- Ron has already mentioned sourcing. I think we believe that we've got a very significant opportunity on cost of goods sold as well as on goods not for resale. We've made some people reorganizations in that area to help us really get after it. We think there's continued opportunity in our OG&A.

And we also think what I would -- there is kind of big opportunities around what I would call sort of modernizing the operating model. So I think as we think about what is undeniably a very competitive environment, what we're very, very focused on is finding the fuel to help us manage that and invest back into the business. And I think we feel that we've got quite a long runway on that across the coming months and years.

Understood. My follow-up question is, can you unpack the back half guidance a little bit more. You raised the ID outlook, you lowered your tax rate. You took up the low end of both your operating profit outlook and as well as your EPS outlook. So what changes from a margin or below the line perspective have you made to help us frame how we should be thinking about the second half of the year?

Yes. So Listen, I think on IDs, we've already talked about. I think we've got much tougher comparisons as we get into the back half of the year, improving grocery volumes. So I think we feel good about where we've set the range on that. I think if I understand your question, it's more around the sort of profit puts and takes.

So I think a few things that we've got going on that. Number one, listen, it's undeniable. We still have a consumer environment that is still pretty uncertain. And whilst we have not yet seen what I would call sort of consumer sentiment translate necessarily into action, that remains an area that we continue to watch very, very carefully.

I think the second thing is that our pharmacy business, we expect it to continue to grow ahead of the rates of the rest of the business. And whilst that will give us dollars, it does create pressure on mix.

The third thing is really around fuel headwinds. We expect that, obviously, it's not in our IDs, but it is in our profit number. We expect that to create a headwind for us the balance of the year as it has done so far year-to-date. We're working very hard, as we said, to offset all of those things with as much sort of cost and efficiency initiatives as we can.

The tax rate you called out, it's very, very marginal. We had a couple of things really kind of move around mainly on state taxes. And candidly, it's -- we're talking decimal points that move that. And so that was the reason that we felt confident enough to kind of raise the floor on the profit guidance but did not change the top end despite the improved ID sales.

Our next question comes from Seth Sigman of Barclays.

I wanted to ask about e-commerce and follow-up there. The growth that continues to accelerate, is there a way to think about the incrementality of what you're seeing there, thinking about new customers versus existing customers? Because you're also obviously seeing non e-commerce is improve as well? And then I guess a related question is just thinking about the shorter delivery windows. What are you seeing -- what is the consumer looking for as they look for that quicker delivery?

Yes. I'll start, David, feel free to add in. But consumer is looking for kind of the things they look for when they shop our stores, but more. I mean they want product to be fresh. They want it to be price right. They want the orders complete and they wanted to delivered fast. I think a few years ago, we might have said next-day delivery on food items works just fine. I think today, the customer is looking for speed and they're willing to pay for it. So I think we've tried to adjust kind of how we do business to how the consumer wants us to do business.

I'm not sure if I can really say much more. But I think more and more people are willing to pay for incredibly fast service within 2 hours.

Yes. Maybe let me take the sort of comment around incrementality. I think a couple of things here. So number one, we're adding new households. I mean that's really, really important because those new households and new households to Kroger. And we're also growing order volumes with consumers that are already shopping with us. And one of the things that our data tells us, and I think this is why it is really, really important is, if people enter our ecosystem through e-commerce, they then shop the entire ecosystem and they become more valuable customers to us overall. So I think that gives us a good sense of there is incrementality there. Of course, you get some switching. Some people will drop out of a store and order online, but people are generally shopping multiple different ways through the Kroger ecosystem.

Okay. That's helpful. And then I wanted to follow up on the pharmacy performance in the quarter. To what extent do you think the script share gains are translating into improvements in other parts of the business, obviously, with ID is accelerating. And then how are you thinking about vaccines for the second half of the year just given there has been a lot of noise there.

Yes. So let me take that one. Listen, on vaccines, listen, I think, obviously, there's some sort of delays in the approvals. I think we'll see that normalize as we get through the sort of later into the year. So I think it's just a delay more than anything. So we expect that to pick up. [indiscernible] come back to the sort of ecosystem comment, which is that when people shop in pharmacy, when they're in the store, it does provide incrementality to the rest of the business. We don't disclose that metric, but we feel great about when somebody walks in and fulfills that prescription or whether they're doing a regular shopping trip. We've given them the option to do those things within a Kroger store or online.

Our next question comes from Paul Lejuez of Citi Group.

Curious if you could talk about performance by different income segments where you're seeing stronger versus weaker results? Also if there are any call outs regionally? And then I just want to go back to the inflation versus unit discussion. If you could share what your assumptions are for the second half and if you do expect units to turn positive at some point?

Okay. Let me kind of walk through several of those here. First of all, we're seeing overall retail food spend has been very stable. I think customers probably cutting back in other areas, but spending on retail food has been kind of flattish. I think the cutting back is probably on discretionary visits, our discretionary purchases and restaurant visits. But I think at the same time, customers are feeling pretty stressed about the economy. They're doing things to save money.

And when you look at income cohorts, low and middle-income households are really looking for deals. They're using coupons more. They're making smaller but more frequent trips and they're buying more private label products. They're also eating out less.

When you look at the higher income households, while they're also concerned about the economy and food prices, they're still spending. And they're splurging on some of the premium products. When you look at the growth in our brands, Private Selection and Simple Truth, where premium products are leading the way. They also are buying larger pack sizes. I think they're also interested in value for serving.

So in both groups, we're seeing less of the maybe discretionary spending. We're seeing some declines in snack categories, adult beverages. So looking ahead, I think we think that the consumer is going to remain cautious. Consumer sentiment continues to be low historically and customers continue to be sensitive about food pricing.

And I think in terms of regional basis, I don't know that there's really been a lot of differences across Kroger in terms of regional differences in that pattern. I think it's kind of a bit of a tale of 2 cities. And in terms of inflation, our internal assumption is 1.5% to 2.5%. And as David said, we were lower than the midpoint, I think, this past quarter. We don't expect it to be beyond our range.

Our next question comes from Thomas Palmer of JPMorgan.

Maybe to start out, I just wanted to follow up on Leah's question on price investments. You did note FIFO gross margin, excluding fuel and specialty pharma was down around 9 basis points year-over-year in the quarter. How are you thinking about the trajectory of FIFO gross margin ex fuel as we look toward the second half of the year?

Yes. Let me take that one. What we've said is we're expecting for the full year that number to be relatively flat. So that should give you sufficient to be able to work out the assumption for the balance of the year. And I think, listen, what we're trying to do with that is -- and as I said, I think we've done a good job of that through the first half is balance, obviously, wanting to offer great prices to our consumers with obviously a whole range of multiple different margin initiatives that we've got going on.

The important thing, I think, just to note, is that if you look at the second quarter and strip out kind of pharmacy, the impact from pharmacy mix, our gross margins on the core business, were really pretty healthy, and we feel good about where they are.

I know there's not yet a significant update on the CEO search. But I did want to ask on this. I mean, one, any, I guess, traits that you're looking for in a CEO? And then second, there seem to be a lot of different initiatives already under review absent a permanent CEO. Are there areas that you're holding off on reviewing or making decisions on until the seat is filled?

Short answer to that is no. We're moving forward aggressively in virtually all areas of the business to position the company for success over the long term. In terms of what -- and I don't want to speak to the search committee, but there's probably no surprises here. You're looking for critical experiences in people's backgrounds. I think you're looking for competencies in terms of expertise of things they've done. You're looking at personal attributes around leadership and style and people skills. So there's really no surprise there.

But it's a unique company and the scale is large. And that's why I think that they're being very careful and very cautious. But I remain confident they're going to find an outstanding leader for Kroger. In the meantime, I'm trying to help our talented team in any way I can. But no, we're going full speed ahead in virtually every area of the business to kind of position us for longer-term success?

Our next question comes from Ed Kelly of Wells Fargo.

Nice quarter. I guess first thing, [indiscernible] higher than expected -- I mean, I think, higher than expected this quarter, given what you accrued in Q1. If you extrapolate that for the full year, it's like $0.10 a share or so. I mean, how should we be thinking about LIFO as it relates to the back half of the year here?

Yes. So we -- let me take that one. So as we have -- whilst inflation is kind of in the guidance range that we expected, it's probably more towards the midpoint of that range. And so as a result, what we did in the second quarter is we made sure that we kind of reset the accruals on LIFO on a year-to-date basis. So what you've got in there is 2 things. You've got to catch up from what we assumed in Q1 into Q2. And then you've got, therefore, the assumption of what I would say inflation, broadly kind of where we're running extrapolated for the balance of the year, and that's why the LIFO charge went up.

So I don't think that LIFO charge is reflective that incremental charge, you'd expect to see that through the balance of the year. You'd split that in 2 between catch-up and then ongoing.

Okay. And then my second question is around the free cash flow guidance, which you didn't take up today even though you have $100 million in EBIT. I mean, maybe slightly higher LIFO, I guess. But then the other thing is maybe some benefit from the Big Beautiful Bill. So why isn't the free cash flow guidance higher? What's the offsets within that?

Yes. I mean I'd come back to sort of some of the things I've already spoken about. I mean, obviously, we didn't raise the EPS guidance, consumer environment remaining uncertain, pharmacy mix, et cetera. And then as we have already said, we're looking to make smart investments back into the business that deliver long-term value from an ROIC perspective. And so we're balancing all of those things and didn't felt therefore prudent to touch the cash flow guidance at this time.

Our next question comes from Julio Marquez of Guggenheim. .

It's John Heinbockel. Ron, maybe first question. I know sourcing, you guys see as a big opportunity. How do you think about sizing that? Is that billions of dollars over time? And then what do you need to do differently? And I know you brought somebody in from the outside do differently than you've been doing to capture that? And how quickly does that occur?

Yes. We think sourcing is a big opportunity, not only the COGS sourcing but also the indirect sourcing. We -- you did reference somebody coming in that was [indiscernible], background PetSmart and Walmart and kind of a long, deep sourcing background in his history. We think the opportunity is big. I don't know that we've sized it in a way that we can share with you or the timing of that. But we do feel like we are benchmarking against other competitors, and we are trying to see if there's a bigger opportunity here than we have realized so far.

I think part of that is simplifying. I've talked to a lot of our CPG partners over the last 6 months. And I think our CPG partners would say we need to reduce the cost to serve you guys, and we need to have simpler promotions with you guys. And I think we're working on both of those. And CPG support has been really terrific the last several months. So I'm not sure I want to commit to how much and when, and I'm not even sure I should at this point, but we do think it's an enormous opportunity that we have yet to realize.

And then the follow-up would be -- right -- you think about speed of delivery, you talked about the 2 hours, what can you do inside the store to speed that up further, right, to where you could get to half that time? Is it how you pick the orders? I think we've talked about this, do you pick by quadrant? And remind us, electronic shelf labels, do you -- I don't know how broadly you've utilized those, is that an opportunity to speed the picking process?

Yes. I think there's a lot of things we're doing to speed things up, and we can get you your order even less than 2 hours but there are probably going to be a different delivery fee associated with doing that. So it's not a -- but most customers are very pleased and very happy with our delivery. I think you're right, technology is a big part of the answer. And whether that's AI, which we're already using to pick multiple orders at the same time. Electronic shelf tags, we are rolling out across the company. I'm not sure what percentage of our stores, we have those in yet, but that is also another kind of improvement in speed.

In some stores, depending on the delivery volume, you may have special picking areas. So we're looking at that as well. So there's a lot to be done, I think, in-store picking. And I think as part of our strategy refresh on e-commerce, we'll be sharing not only what's going on inside the store, but also the last mile delivery because I think we've got some good news to share there as well.

Our next question comes from Robert Ohmes of Bank of America.

I was hoping you guys -- could you guys talk a little more and maybe it's not that significant as it could be, but just the nondigital customers and the shift back to paper coupons and how significant can that be? Is that a new incremental driver or a significant tailwind?

Well, I think it's certainly going to help. I mean when you think about the customers in our stores, and believe me, I've talked to hundreds and hundreds over the last 6 months in virtually every division where we operate. And what you heard over and over again is that older customers are not as digitally proficient as maybe younger customers and older customers are feeling like they're -- they want the same deals that the person with the smartphone is getting. And so we wanted to make them on an equal playing field. And I think the end result we'll get incremental business from that.

I think the other customer group that we weren't responding to very well were people who don't have a $600 iPhone and those people also were a little bit of disenfranchised with our digital coupons. So we're really trying to appeal to a broader customer segment, not only people that are very digitally savvy, but also people who are not able to be.

And does it -- is it pulling a lot of new customers? And I also wanted to ask on the fuel being down, is there any changes in the fuel rewards program on the digital side or anything going on there?

Well, let me take the first piece around that. I mean the way that we're looking at that these paper coupons is it generating lift, and I think it is. So we're seeing unit lift from this, and it's part of the overall equation that we look to balance to make sure that we're offering great prices to customers. I think the other important thing to add to Ron's point is, this is something that we measure. So we're measuring customer feedback on this, and we're getting good feedback from customers which I think is an important part of our retention strategy and recruitment strategy as we look to give great offers to our consumer. No immediate plans to change the fuel rewards within our Kroger Plus card offerings.

Our next question comes from Jacob [indiscernible] Philips of Melius Research.

I did want to say that my mom appreciates the paper coupons, in case you want the anecdote. But I wanted to ask about pharmacy. So there's obviously a lot of share to gain from like closures. And then I think on -- you said that it's incremental when they start shopping in the store, but also on the flip side, I think like a good percent of your current customers don't even realize that the stores have pharmacy. So can you talk a little bit about what you're doing to kind of like close the gap both ways to get people to shop the store more [indiscernible]?

Yes. It's a great point. First of all, thank your mother, for shopping at Kroger. We always appreciate that. In terms of pharmacy, you're right. A lot of our customers don't have an awareness that we even have a pharmacy, and we think that's a big opportunity. And I think what we're going to be doing going forward is one, positioning it better in the store, but also trying to tie it into a whole HBC strategy because HBC health and beauty products are a growing category. We think that we've kind of buried that in the store as well.

So I think it's probably a merchandising shift to kind of tie in pharmacy, which has operated kind of separately in the past to tie it in with the rest of the store in a way that HBC becomes kind of a shop of its own, much like the meat department or the deli bakery, et cetera, et cetera.

I don't know, David, anything you want to add?

No, nothing to add. I mean, I think it's an important part of the business. We've got a very big opportunity tying that into the kind of overall progress ecosystem through loyalty is a big opportunity for us.

Yes. Our pharmacy team is doing a really nice job. And we think there's a big opportunity in pharmacy given the [indiscernible] closures and the new ownership structure at some of our competitors, we think there's going to be an opportunity to continue to grow pharmacy better than ours.

Great. And then so you mentioned AI as like a key modernization tool. Do you have anything like concrete examples of where it's driving measurable improvement or where you expect to see improvement going forward? And then I guess more generally, just like how -- what's the strategy for rolling out different tools or use cases?

Yes. Let me take that one. I think the way that we think about AI is it's really the natural kind of evolution of many things that we've been doing for quite some time. So obviously, we've got a couple of decades worth of unbelievable data from our loyalty program, which is an enormous data asset, which obviously is a terrific foundation for us to have. And we've also actually got a deep bench of data science capability and other capability primarily in a 8451 division.

If I think about things that we've done so far, we've got a couple of good examples. I'm really just going to highlight one. We've deployed an AI tool specifically against shrink which is an area that we've been performing well in. We can see the direct result of the AI tool that allows us to see much better inventory levels, sell-through on a by store level. And we're actually now kind of trying to transition that less or sort of away from just being a shrink tool actually into an opportunity for us to accelerate the top line as well by identifying sales opportunities, primarily on seasonal items more efficiently. So I think we've got some good proof points, and that's a really good one.

As I think about what we do next on this, and we've got lots of things that we are experimenting with I think, one, it's an opportunity for us to deepen customer engagement, so using it as a sales acceleration tool, and we see plenty of opportunity there. But I think there are some obviously more obvious ones around what I would call sort of operational excellence and efficiency that we have a lot of opportunity to go after and sort of links to my comments around sort of modernizing the way we work and the operating model.

And just throw out a couple of other examples that's going to be really important and already is in scheduling by department by hour of the day. [ Planogramming ] is going to be very helpful to us in terms of using AI. And then finally, the whole customer personalization is going to be utilizing a lot of AI tools as well.

Our final question for today comes from Michael Montani of Evercore ISI.

Just wanted to ask, first off, if there's any way to kind of conceptualize the potential profit impact from the strategic review. I know we've been thinking several hundred million potentially. But secondly, would that be included in the guide? Or is that external to that?

You're talking about e-commerce specifically?

Yes, e-com.

Yes. I think what we will do is kind of talk in kind of general terms about our path to profitability and with the time line associated with that. But in terms of the amount, I think it's probably not a number we would disclose nor are we ready to disclose it in any case because we're still doing the review as we speak.

Yes. And to be clear, it is not included in the guide.

Thank you. At this time, I will now hand back to Ron Sargent for any further remarks.

Well, thank you all for your questions. We really appreciate them, particularly the comment from Jacob's mother. As you know, before we conclude our earnings call, we'd like to share a few comments with any of our associates who are listening in. I'd like to thank our associates with a strong improvement that we saw in customer equity scores.

As I shared, our customers are seeing how we're improving store conditions, how we're improving freshness and how our team is improving the shopping experience. Setting priorities and developing strategies is really only half the battle. I think the hard part is executing the business, and that's the challenge, and our teams are doing a really terrific job.

So thanks, everybody, for joining us on the call this morning. We look forward to speaking with all of you again soon, and we hope to see you in our stores.

Thank you all for joining today's call. You may now disconnect your lines.