Kroger KR Q1 2025 Earnings Call Transcript

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ETCALL PARTICIPANTSChief Executive Officer — Ron SargentChief Financial Officer — David KennerlyNeed a quote from one of our analysts. [ tected]RISKSFuel Performance: CFO Kennerly stated, "Fuel results were behind expectations this quarter, a headwind to our results. " and indicated fuel fitability and volume are expected to remain a headwind for the remainder of the year

Store Closures: Plans are in place to close apximately 60 underperforming stores over the next eighteen months

Management cited, "not all of our stores are dering the sustainable results we need. "E-commerce Unfitability: CEO Sargent said, "we're not fitable at this point

And we must become fitable in our e-commerce, and we've got a lot of work to do. "TAKEAWAYSIdentical Sales Without Fuel: Identical sales, excluding fuel and adjustment items, increased 3. 2% in Q1 FY2025, driven by strength in pharmacy, e-commerce, and fresh category sales

Management reported their "best fit imvement yet on a quarter-over-quarter basis. "Our Brands (Private Label) Performance: Q1 FY2025 marked the seventh consecutive quarter of growth outpacing national brands; Simple Truth and Private Selection led this segment

Fresh Category Performance: Fresh identical sales outperformed center store sales and continued to be a sales driver

Operating G&A Rate: Increased 63 basis points in the first quarter compared to the same period last year, excluding fuel and adjustment items

After excluding the impact of the pharmacy sale and pension contribution, the rate was relatively flat

Debt Ratio: Net total debt to adjusted EBITDA was 1. 69; below target range of 2

Letter of Credit Draw by Ocado: Ocado fully drew £152 million under contractual rights in Q1 FY2025; management described as a "contractual thing and nothing more. "Price Investments: Lowered prices on more than 2,000 additional ducts so far this year, coupled with simpler motions; management expects price investments to be "margin-neutral"SUMMARYThe Kroger Co. 57%) dered a 3. 2% increase in identical sales excluding fuel in Q1 FY2025, supported by pharmacy, e-commerce, and fresh, while announcing apximately 60 store closures over the next eighteen months as part of a renewed capital allocation strategy

The company reported a 15% surge in e-commerce sales in Q1 FY2025, yet remains unfitable in the segment, and underscored plans to accelerate store investments, with 30 major jects scheduled for completion in 2025, but continues to expect fuel to be a fitability headwind through year-end

Management created a standalone e-commerce unit to imve focus and fitability, with digital initiatives including AI-enabled tools deployed in stores and fulfillment

The company is increasing cost optimization efforts, targeting imved operational efficiency and re savings into pricing and customer experience enhancements

Gross margin rate benefited from factors including lower shrink, imved sourcing, and the sale of the specialty pharmacy unit

Pharmacy growth created some margin mix pressure

Market gains reported in areas with new store openings, with no notable shifts in higher-income customer behavior or nounced regional sales differences

Several new labor contracts have stabilized workforce relations despite recent strikes, and management reported record-high associate retention rates

Ocado's full letter of credit draw was contractually permitted and not characterized as a liquidity or strategic event by management

Management reaffirmed macroeconomic caution and anticipates consumer caution to persist, with increased demand for private labels and value-driven motions across all income segments

INDUSTRY GLOSSARYASR (Accelerated Repurchase): A method for a company to buy back a significant amount of its s quickly through an agreement with a third party, thereby reducing s outstanding and returning capital to holders

GLP-1: Glucagon- peptide-1 medications, prescribed for diabetes and weight management, referenced in pharmacy sales trends

Kroger Specialty Pharmacy: A divested unit once operated by The Kroger Co. , whose sale affected gross margin and operating metrics

Ocado: A U. -based grocery nology and fulfillment partner that operates under a contractual relationship with The Kroger Co

For automated warehouse and dery solutions

OG&A Rate: Operating general and administrative expenses, presented as a percentage of sales, excluding fuel and certain adjustment items

FIFO Gross Margin: Gross margin calculated using the first-in, first-out inventory accounting method, excluding fuel, rent, depreciation, amortization, and certain adjustment items

CPG: Consumer Packaged Goods companies supplying branded ducts to The Kroger Co

ESI: Express Scripts, Inc. , a major pharmacy benefit manager, mentioned in relation to pharmacy sales impact

Full Conference Call TranscriptRon Sargent: Good morning, everyone

Thank you for joining our call today

Before jumping into the results, I wanted to a few thoughts since I last spoke to you in March

After nearly four months as CEO, I've been very impressed with the many talented associates I've met across the company

Has a strong bench of experienced operators and dedicated associates who can move our company forward

After spending my career in retail, one thing's : Retail always starts with the customer

Our strategies are focused on our resources, which should be dedicated to how we can make the biggest impact on serving our customers

Grounded in these principles, my priorities in this role are to position The Kroger Co

For long-term growth, accelerate top-line sales, and run great stores

We can do this by better focusing on our core and by creating a growth culture in the company

Has a long runway with many opportunities ahead, and I'm grateful to be part of the team as we transition to our next phase of growth

In the past few months, we've made a number of changes to move faster and put increased focus on our customer

We're directing investments toward jects that will grow our core, including plans to accelerate new store openings

We are reassessing our capital allocation strategy to make sure we are spending our capital on jects that offer the highest returns

We are reviewing our non-core assets

We're aggressively looking for ways to reduce costs throughout the company, and we expect to reinvest those cost savings directly into lower prices and additional store hours for our associates so that they can better serve customers

Finally, we have restructured our leadership team to ensure we have the right talent in place

We created a new e-commerce unit aligning all areas of the online customer experience under Yale Casa, our Chief Digital Officer

We continue to elevate great leaders across the company by appointing Joe Kelly, our Senior Vice President of Retail Divisions, as well as new division presidents in King Soopers, Food 4 Less, and Texas, where we consolidated two divisions just last week

These changes put talented executives in roles where they can support our stores and imve the customer experience

We are making meaningful changes to the to create a culture that benefits our customers and our associates while imving long-term holder value

In the first quarter, we're beginning to see the benefits of many of these changes

This morning, we announced solid first-quarter results with strong sales in pharmacy, e-commerce, and fresh

Identical sales, excluding fuel and adjustment items, increased 3

Now let's take a closer look at the quarter

Strong performance in the fresh category supported our identical sales without fuel results

Fresh identical sales were better than center store sales

We know our customers want healthier options, and we are well-positioned to der them across our fresh departments

Ron Sargent: Turning to our brands, as more customers for value, we are excited the potential for the Our Brands

We are growing sales by offering high-quality ducts to customers at all budget levels

This quarter, our brands grew faster than national brands for the seventh consecutive quarter

Simple Truth and Private Selection led our sales growth, highlighting that customers want premium ducts while also spending less

Our Brands is also creating new ducts that support customers' healthier eating habits

For example, earlier this year, we identified tein as a major customer trend, and soon, Simple Truth will introduce 80 new tein ducts to our asment

Targeted directly at this important trend, these ducts include everything from bars and powders to shakes, all from a natural and organic brand that customers trust

This is just one way that The Kroger Co

And our brands are innovating to stay ahead of what our customers want

To keep imving the customer experience, we are working to der more accurate orders faster and reduce pickup wait times

These imvements are attracting new households to e-commerce and giving our current households more reasons to shop with us

As our e-commerce grows, it represents a bigger impact on our results

Our teams are committed to growing both e-commerce sales and imving fitability

During the first quarter, we made good gress and dered our best fit imvement yet on a quarter-over-quarter basis

To continue driving imvements, our team is reviewing all aspects of our strategy and operations to imve the customer experience as well as the financial performance

David will more on this topic later

We know that our best customers shop with us through both e-commerce and in stores, which makes it important for us to continue building and running great stores

High-growth geographies, growing our overall square footage, and adding new jobs

As I mentioned earlier, we're simplifying our and reviewing areas that will not be meaningful to our future growth

Unfortunately, today, not all of our stores are dering the sustainable results we need

Also important to note, we paused our annual store review during the merger cess

To position our company for future success, this morning, we announced plans to close apximately 60 stores over the next eighteen months

We don't take these decisions lightly, but this will make the company more efficient, and The Kroger Co

Will offer roles in other stores to all associates currently employed at affected stores

To recap, our top priorities are

We're going to move with speed

We're going to concentrate on our core, and we're going to run great stores

This is how we'll position The Kroger Co

For long-term performance

Before David gets into more detail on our financial results, I'd to talk a little bit our broader operating environment

Customers continue to spend cautiously in an uncertain economic environment

Many customers want more value, and as a result, they're buying more motional ducts and more of our brands' ducts

They're also eating more meals at

Is well-positioned to support our customers' changing shopping habits

We offer compelling motions and fuel rewards, outstanding Our Brands ducts, and personalized motions that offer families better savings on the ducts they use the most

We're simplifying our motions to make it easier for customers to and to see value at the shelf

As part of our work to keep prices low, we're also watching the changing environment around tariffs

Our model is flexible to respond to those kinds of shifts, and as a domestic food retailer, we expect a smaller impact than some of our competitors

Where we do see potential tariff impact, we are actively looking for ways to avoid raising prices for our customers, and we consider price changes as a last re

Tariffs have not had a material impact on our so far, and given what we know today, we do not expect them to going forward

I'd to spend a moment talking our associates

Our associates are the backbone of our company and are the people who create a great customer experience

One of our top operational priorities is imving in-stock levels

We imved in-stock rates in every division this quarter

I appreciate our associates' hard work every day to make this happen

We continue to imve our associates' wages and benefits while in their development and well-being

These investments include hourly pay, plus health care, and pensions, as well as nology that makes work easier in our stores, including a virtual AI assistant that is imving associate ductivity and engagement

This well-rounded apach is ducing results, with both.