The Kroger Co.

Good morning and welcome to the Kroger Co. 3rd Quarter 2025 Earnings Conference Call. If you would like to ask a question, please press star followed by 1 on your telephone keypad. 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 3rd Quarter 2025 Earnings Call. I am joined today by Kroger's Chairman and Chief Executive Officer, Ron Sargent, and Chief Financial Officer, David Kennerly. 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, 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 six consecutive quarters of double-digit sales growth. Earlier this year, we formed our new e-commerce team headed by Yale CASA, 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 and 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 three 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 non-core 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 continues 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're cutting back on discretionary purchases. Food spend has been more resilient than non-food 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 and 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 brand's 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 two-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 brand's products carry a more favorable margin profile and also improve 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 econ 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 cost 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 task and operate more efficiently, putting talent closer to the customer and building more streamlined organization. As part of this effort, we are returning to in office work five 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 cart assistant, on the Kroger website and mobile app in the first quarter of 2026. The cart 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 toward 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?