Kroger Q2 Earnings Beat on Cost Savings, Sales Outlook Cut

The Kroger Co. KR reported second-quarter fiscal 2026 adjusted earnings of $1.09 per share, which increased 4.8% year over year and beat the Zacks Consensus Estimate of $1.05. Cost savings, stronger pharmacy and fuel performance, and improved e-commerce profitability supported the bottom line.

Total sales of $34,621 million increased 2% from $33,940 million but missed the consensus mark of $34,688 million. Identical sales without fuel rose 0.2%, while adjusted e-commerce sales advanced 20%.

KR's Sales Momentum Stays Soft

Excluding fuel, the sale of Vitacost and the exit of certain fulfillment centers, sales edged up 0.1%. Identical sales without fuel slowed from 3.4% growth in the year-ago quarter. 

The Inflation Reduction Act reduced identical sales by 138 basis points. Management also cited a 35-basis-point Cyclospora headwind from produce, a roughly 60-basis-point drag from the shift to generic prescriptions and a 30-basis-point impact from egg deflation. Customer traffic increased, but grocery unit growth decelerated slightly from the first quarter.

Kroger's Digital and Brands Fuel Growth

Adjusted e-commerce sales rose 20%, led by delivery. The company delivered its second consecutive quarter of profitable e-commerce growth, while new e-commerce customers increased 20% from a year ago. Demand continued shifting toward faster fulfillment, with encouraging growth in delivery orders completed in less than an hour.

Kroger Precision Marketing profit climbed 24%, its strongest growth since 2021, with media monetization up 88 basis points. Our Brands outpaced national brands by 250 basis points, while Private Selection sales increased more than 14%. Our Brands penetration also increased about 50 basis points.

The Kroger Co. Price, Consensus and EPS Surprise

The Kroger Co. price-consensus-eps-surprise-chart | The Kroger Co. Quote

KR's Margins Improve Despite Cost Pressure

Gross margin was 22.4% of sales compared with 22.5% a year earlier. The FIFO gross margin rate, excluding rent, depreciation and amortization, fuel and adjustment items, increased 13 basis points.

Improved e-commerce profitability, media, pharmacy mix, sourcing initiatives and tariff refunds helped margins. Higher shrink, transportation costs and customer value investments were offsets. The operating, general and administrative rate, excluding fuel and adjustment items, increased 33 basis points on wage investments, higher health care costs and sales deleverage. Adjusted FIFO operating profit slipped 1.4% to $1,076 million.

Kroger's Pharmacy and Fuel Add Support

Pharmacy generated strong operating profit growth as the mix shifted from branded to generic drugs. Core prescription growth and continued GLP-1 momentum also supported the business despite the sales pressure from lower drug pricing.

Fuel gallons increased and outpaced the industry by about 520 basis points. Fuel reward redemptions rose nearly 6%, while higher margins per gallon in a volatile energy market contributed to modestly higher fuel profitability.

KR's Cash Flow Funds Share Repurchases

Net cash provided by operating activities totaled $3,085 million in the first half, down from $3,688 million a year earlier. Capital investments, excluding lease buyouts, were $2,651 million compared with $2,030 million.

Kroger repurchased $1 billion of shares during the quarter and $1.2 billion year to date. About $800 million remained under its $2 billion authorization. Net total debt to adjusted EBITDA was 1.91, below the company's 2.30-2.50 target range.

Kroger Cuts Sales View, Maintains Profit Goals

Kroger lowered fiscal 2026 identical sales without fuel guidance to 0.2-0.8% from 1-2%. The outlook includes an approximately 140-basis-point unfavorable impact from the Inflation Reduction Act. Management expects third-quarter identical sales without fuel to be slightly better than the fourth quarter.

The company maintained adjusted FIFO operating profit guidance of $5-$5.2 billion and adjusted earnings of $5.10-$5.30 per share. Free cash flow is still projected at $2.7-$2.9 billion, with capital expenditures of $3.8-$4 billion.

Shares of this Zacks Rank #3 (Hold) company have declined 10.2% over the past year against the industry’s growth of 2.2%.

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