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# The Kroger Co. (KR): Business, Risks and Management's Discussion Kroger's fiscal year ends on the Saturday closest to January 31. The company labels the 52 weeks ended January 31, 2026 as fiscal 2025. Its fiscal 2026 second quarter is the 12 weeks ended August 15, 2026, and "first two quarters" means the 28 weeks to that date. All amounts are in US dollars. ## Business *From the Form 10-K for fiscal 2025 (year ended January 31, 2026), accession 0001104659-26-037723.* Kroger is one of America's largest retailers. It sells groceries, fresh food, pharmacy products and fuel to US households through its stores and online. At January 31, 2026 it ran 2,697 supermarkets in 35 states and the District of Columbia under a variety of local banners. Of those stores, 2,250 had pharmacies and 1,731 had fuel centers. About 51% of the supermarkets were in company-owned facilities. Nearly all of the money comes from selling products at prices above the cost of buying, moving and selling them. The retail operations are Kroger's only reportable segment and produce substantially all consolidated sales. All operations are in the United States. Fiscal 2025 sales were $147.6 billion. By product type they break down as follows: - **Non-perishable** (grocery, general merchandise, health and beauty care, natural foods): $77.6 billion, or 52.5%. - **Fresh** (produce, floral, meat, seafood, deli, bakery, prepared foods): $37.2 billion, or 25.2%. - **Pharmacy:** $18.2 billion, or 12.3%, up from 10.6% of sales in fiscal 2024. - **Supermarket fuel:** $13.6 billion, or 9.2%. Fuel has very low gross margin and operating-expense rates, but it is also part of Kroger's loyalty offering. - **Other:** $1.1 billion, or 0.8%. This is mainly third-party media revenue, data analytic services and in-store health clinics. It fell from 2.1% after Kroger sold Kroger Specialty Pharmacy to Elevance Health in October 2024 for $464 million. The strategy rests on four pillars: Fresh, *Our Brands*, Personalization and eCommerce. - **Private label.** *Our Brands* produced more than $39 billion of fiscal 2025 sales. The range comes in tiers: Private Selection (premium), Kroger (mainstream), Smart Way (value) and Simple Truth (natural and organic). Kroger owns 33 food production plants, including 14 dairies and nine deli or bakery plants. They make about 20% of *Our Brands* units sold. - **Data and loyalty.** Kroger serves about 63 million households a year, and over 95% of transactions are tied to a loyalty card. - **Alternative profit.** The loyalty data supports what Kroger calls its "alternative profit" businesses, which produced $1.5 billion of operating profit in fiscal 2025. These include the 84.51° analytics unit and Kroger Precision Marketing, its retail media business. Kroger describes that business as higher-margin than grocery retailing and an important driver of digital profitability. - **eCommerce.** Pickup is offered at 2,408 supermarkets. Delivery reaches substantially all customers from stores, customer fulfillment centers and third-party platforms. People and labor costs are a major part of the cost base. More than two-thirds of associates are covered by about 350 collective bargaining agreements, which usually run three to five years. In 2025 the average hourly wage was more than $20, or more than $26 including benefits. Leadership changed in 2025-2026. Gregory S. Foran, formerly CEO of Walmart U.S. and of Air New Zealand, became Chief Executive Officer in February 2026. Ronald L. Sargent had served as interim CEO since March 2025 and remains Chairman. Since July 1, 2026 he has served in a non-executive role (Form 8-K, accession 0001104659-26-078272). David J. C. Kennerley, formerly PepsiCo's CFO for Europe, is Executive Vice President and Chief Financial Officer. ## Risk factors *From the fiscal 2025 Form 10-K, accession 0001104659-26-037723, Item 1A. Updates are from the second-quarter Form 10-Q, accession 0001104659-26-108926.* The risks below are the ones the filing treats as specific to Kroger's model, condensed: - **Competition and channel shift.** Kroger competes with online retailers, mass merchants, club stores, deep discounters, dollar stores and specialty grocers. Third-party delivery widens the choice of stores for every shopper. The 10-K names AI-powered "agentic shopping" as a new threat: if AI agents choose purchases on price or speed, Kroger could be cut out of the customer relationship, losing visibility and pricing influence. Kroger says it has closed customer fulfillment centers that missed expectations. Profits depend on cutting the cost of fulfilling orders outside the store. - **Alternative profit execution.** The flywheel model depends on loyal households and digital engagement feeding the media and data businesses. Kroger warns that this strategy may not succeed. - **Labor relations and costs.** Strikes have happened before when contracts expired, and could happen again. Higher wage, healthcare and pension costs, minimum-wage changes and rigid contract terms could raise operating costs. Kroger also depends on keeping key executives, which the 2025-2026 leadership turnover makes more relevant. - **Multi-employer pensions.** Kroger estimates its share of underfunding in multi-employer pension plans at about $1.2 billion ($942 million after tax) at December 31, 2025, down from $1.9 billion a year earlier. This underfunding is not a direct liability. However, leaving certain markets or stopping contributions could trigger large withdrawal liabilities. Kroger is also named fiduciary of two plans and bears their investment risk. Contributions were $496 million in 2025, up from $398 million, because prefunding credits in the UFCW Consolidated Pension Plan ran out. - **Product safety.** Contamination, recalls or illness linked to *Our Brands* products or national brands could damage the business and its reputation and lead to litigation. - **Data, cybersecurity and technology.** Kroger relies on complex systems and is in the middle of a multi-year legacy-system modernization. It holds sensitive customer data, including pharmacy data covered by HIPAA. It operates its own payment option, Kroger Pay, and is subject to card-network rules. Breaches could bring fines, litigation and lost customers. Kroger says no cybersecurity incident has materially affected it in at least the last three years. - **Legal and regulatory.** The open matters include: - Albertsons' lawsuit over the terminated merger (see Current quarter). - Opioid litigation not covered by settlements. - Antitrust, privacy, healthcare and food-safety regulation. - Extended producer responsibility packaging laws. - Scrutiny of sustainability goals from both supporters and critics. - **Indebtedness and ratings.** Kroger needs access to debt markets to refinance maturities. A rating downgrade would raise borrowing costs. - **Acquisitions and integration.** Expected synergies may not materialize, and integration can bring unforeseen costs. This risk now applies directly to the pending Giant Eagle acquisition. - **Fuel and the economy.** Fuel demand and margins depend on prices, regulation and geopolitics. Consumer spending depends on employment, inflation, tariffs and government benefits such as SNAP. Shrink and organized retail crime also hurt results. - **Weather, climate and supply chain.** Hurricanes, floods, wildfires and other events can disrupt stores and logistics. Hydrofluorocarbon (HFC) refrigerant phasedown rules force capital spending on refrigeration. Supplier disruptions, tariffs and trade sanctions can interrupt product supply. ## Management's discussion: fiscal 2025 *From the fiscal 2025 Form 10-K, accession 0001104659-26-037723, Item 7. Some full-year figures are from the fourth-quarter earnings release furnished on Form 8-K, accession 0001104659-26-023800.* In fiscal 2025 underlying sales and adjusted profit grew modestly. Reported earnings, however, were cut by a $2.5 billion write-down of Kroger's automated eCommerce fulfillment network. **Sales.** Total sales rose 0.4% to $147.6 billion. - Sales to retail customers without fuel rose 1.3% to $132.7 billion. - Supermarket fuel sales fell 9.3% to $13.6 billion: the average retail fuel price fell 6.1% and gallons fell 3.4%. - The October 2024 sale of Kroger Specialty Pharmacy removed sales that had been $2.0 billion in fiscal 2024. - Excluding fuel, Kroger Specialty Pharmacy and a Colorado labor dispute, sales grew 3.1%. - Identical sales without fuel rose 2.9%, driven by pharmacy, eCommerce and Fresh. Spend per item rose while units sold fell. - eCommerce sales rose 16%, or 17% excluding exited fulfillment markets, the sale of Vitacost.com and the discontinued Ship Marketplace. Delivery led the growth, and eCommerce sales topped $16 billion. **Margins.** Gross margin rose to 22.9% of sales from 22.3%. - Excluding fuel and the labor dispute, the FIFO gross margin rate rose 44 basis points. About 30 basis points of that came from selling the low-margin specialty pharmacy business. The rest came from sourcing gains, lower shrink and lower supply-chain costs, partly offset by price investments and faster growth in low-margin pharmacy sales. - The OG&A rate rose to 19.2% of sales from 17.3%. Excluding fuel and adjusted items it rose 29 basis points, mostly because of the pharmacy divestiture, higher healthcare costs and higher multi-employer pension contributions. - The LIFO charge rose to $157 million from $95 million because product cost inflation was higher. **The fulfillment network write-down.** A strategic review of eCommerce led Kroger to close its automated fulfillment centers in Pleasant Prairie, Wisconsin, Frederick, Maryland and Groveland, Florida in January 2026, because they had not met expectations. It also cancelled a planned site in Charlotte, North Carolina. Kroger recorded $2,497 million of impairment and related charges ($1,908 million after tax), including a cash termination payment of about $350 million to its partner Ocado. Kroger will keep serving eCommerce from stores, third-party delivery partners and automated facilities where demand is dense enough. The fourth-quarter release said the review is expected to improve eCommerce operating profit by $400 million in 2026. **Other charges in fiscal 2025.** These were: - $100 million to close about 60 stores. - $47 million of severance for cutting nearly 1,000 corporate administrative roles. - $161 million of litigation and settlement charges related to the terminated Albertsons merger. - A $50 million intangible-asset impairment on a subsidiary classified as held for sale. **Earnings.** - Operating profit fell to $1.9 billion (1.28% of sales) from $3.8 billion (2.62%). - Adjusted FIFO operating profit, which excludes these items and the LIFO charge, rose 5% to $4.9 billion. - Net interest expense rose to $639 million from $450 million. Debt was higher on average after the 2024 bond issue, and interest income fell after Kroger spent $5.0 billion on an accelerated share repurchase and redeemed $4.7 billion of notes tied to the Albertsons deal. - The effective tax rate was 14.7%, helped by deferred tax assets recognized on the Vitacost.com sale. - Net earnings attributable to Kroger were $1,016 million, or $1.54 per diluted share, down 58% from $3.67. - Adjusted EPS rose 9% to $4.85 from $4.47, helped by higher adjusted FIFO operating profit, a lower tax rate and fewer shares outstanding. **Cash and capital.** - Operating cash flow rose 26% to $7.3 billion. - Capital investments were $3.9 billion, up from $3.6 billion, with more spent on major store projects. Kroger opened 16 stores and closed 50 for operational reasons, ending the year with 2,697 stores, and completed 278 remodels. - Kroger returned $4.3 billion to shareholders. Dividends paid were $885 million, or $1.34 per share, up from $1.22. In 2025 Kroger repurchased 41.8 million shares for $2.7 billion at an average of $65.21. The $5.0 billion accelerated repurchase from December 2024 finished in the third quarter of 2025 with 75.6 million shares retired in total. - In December 2025 the Board authorized a new $2.0 billion buyback. - Total debt, including finance leases, fell $339 million to $17.6 billion, mainly because finance-lease obligations dropped with the Ocado payment. Cash and temporary cash investments were $3.3 billion. - Kroger had no commercial paper and no borrowings on its $2.75 billion revolving credit facility, which runs to September 2029. The leverage ratio under the credit facility was 1.54 to 1, against a 3.50 to 1 limit. - Kroger aims for net total debt of 2.30 to 2.50 times adjusted EBITDA, compared with 1.76 at year end, and wants to keep its investment-grade rating. ## Current quarter: second quarter of fiscal 2026 (12 weeks ended August 15, 2026) *From the Form 10-Q for the quarter ended August 15, 2026, accession 0001104659-26-108926. Guidance, Kroger Precision Marketing growth and the leverage ratio are from the second-quarter earnings release furnished on Form 8-K, accession 0001104659-26-106890. The same release was furnished again on Form 8-K/A, accession 0001104659-26-106941, to correct a date on the cover page.* The second quarter showed a split between reported and underlying results. Higher fuel prices and the absence of last year's charges lifted reported sales and earnings. Underlying grocery sales were nearly flat, and adjusted operating profit slipped. **Sales.** Total sales rose 2.0% to $34.6 billion. - Supermarket fuel sales rose 25.6% to $4.1 billion, almost entirely because the average retail fuel price rose 25.3%. - Sales to retail customers without fuel fell 0.5% to $30.2 billion, reflecting the Vitacost.com sale, closed stores and exited fulfillment markets. Excluding those items and fuel, sales rose 0.1%. - Identical sales without fuel rose only 0.2%, against 3.4% a year earlier. eCommerce, natural foods, meat and seafood, bakery and pharmacy grew. Four headwinds offset them: - Inflation Reduction Act drug-pricing provisions: 138 basis points. - Customers switching from brand-name to generic prescriptions: 61 basis points. - A Cyclospora outbreak: about 35 basis points. - Egg deflation: 30 basis points. - eCommerce sales rose 14%, or 20% on an adjusted basis. Kroger says its eCommerce business, including third-party media revenue, was profitable in the quarter. - Kroger Precision Marketing's profit grew 24%. **Margins.** Gross margin was 22.4% of sales, against 22.5%. - Excluding fuel, the FIFO gross margin rate rose 13 basis points, driven by better eCommerce profitability, media revenue, pharmacy margins, sourcing and tariff refunds. Kroger says it reinvested the tariff refunds in lower prices. Higher shrink, higher transportation costs and price investment offset part of the gain. - The LIFO charge fell to $39 million from $62 million because Kroger expects lower inflation. - Excluding fuel and adjusted items, the OG&A rate rose 33 basis points, driven by planned associate wage investment, higher healthcare costs and weak supermarket sales, partly offset by cost savings and lower incentive pay. - Depreciation fell 16 basis points as a share of sales because of the fulfillment-center closures. **Earnings.** - Operating profit rose 12.5% to $971 million (2.80% of sales) from $863 million (2.54%). - Charges in operating expenses were smaller than a year earlier. Last year's quarter carried $168 million: $121 million of Albertsons-related litigation and settlement charges and $47 million of severance. This year's quarter carried $69 million: $56 million of "transformation costs," mainly consultant fees for business transformation and cost savings, and $13 million of Albertsons-related litigation charges. - Adjusted FIFO operating profit, which excludes these charges and the LIFO charge, fell 1.4% to $1,076 million from $1,091 million. - Net interest expense was $156 million, against $144 million. - The tax rate rose to 23.6% from 21.0%. - Net earnings attributable to Kroger were $641 million, or $1.05 per diluted share, against $609 million and $0.91. - Adjusted EPS rose 5% to $1.09 from $1.04. The gain came from fewer shares (608 million diluted against 665 million) and the lower LIFO charge. It was partly offset by lower non-fuel adjusted operating profit and higher taxes. **First two quarters.** - Sales rose 2.1% to $80.7 billion. - Identical sales without fuel rose 0.6%. - Diluted EPS was $2.51, against $2.20. Adjusted EPS was $2.67, against $2.53. - Operating cash flow fell to $3.1 billion from $3.7 billion. Media and pharmacy receivables grew, partly because of the Inflation Reduction Act's maximum-fair-price provision. Inventory also used more cash because of timing, better in-stock levels and higher fuel costs. - Capital investments rose to $2.7 billion from $2.0 billion because of the timing of major store projects. Kroger expects full-year capital investment to be about the same as in 2025. Over the last four quarters it opened, expanded, relocated or acquired 35 supermarkets and completed 272 remodels. **Capital returns and balance sheet.** - Kroger repurchased 21.2 million shares for $1.3 billion in the first two quarters at an average of $60.63, including $1,069 million in the second quarter. The December 2024 program was used up in the first quarter. $801 million remained under the December 2025 authorization, which Kroger expects to finish by the end of fiscal 2026. - The quarterly dividend was raised 11%, to $0.39 declared per share from $0.35, the 20th consecutive year of increases. - Kroger repaid $500 million of 3.5% senior notes from cash. Total debt fell $569 million from the $17.6 billion at fiscal year end. - Cash fell to $1.7 billion. Net total debt to adjusted EBITDA rose to 1.91 from 1.63 a year earlier, still below the 2.30-2.50 target. **Guidance (September 11, 2026).** Kroger cut its fiscal 2026 identical-sales outlook and kept its profit targets. The adjusted guidance lines are: - Identical sales without fuel: 0.2% to 0.8%, down from 1.0% to 2.0%. This includes about 140 basis points of Inflation Reduction Act headwind. - FIFO operating profit: $5.0 to $5.2 billion (unchanged). - EPS: $5.10 to $5.30 (unchanged). - Free cash flow: $2.7 to $2.9 billion (unchanged). - Capital expenditures: $3.8 to $4.0 billion (unchanged). - Tax rate: 23% (unchanged). CFO Kennerley tied the cut to first-half results and the macro environment. CEO Foran called improving sales momentum "a top priority." **Giant Eagle acquisition (agreed during the quarter).** On July 1, 2026 Kroger signed a merger agreement to acquire Giant Eagle, Inc. Giant Eagle is a family-owned food and pharmacy retailer based in Pennsylvania, with stores in Ohio, Pennsylvania, West Virginia, Maryland and Indiana. - **Price:** about $1.65 billion, subject to customary adjustments. That is $1.25 billion in cash plus about $400 million of assumed debt. - **Divestitures:** the companies expect to sell a limited number of Giant Eagle stores to obtain regulatory clearance. - **Timing:** closing is expected in fiscal 2027, after the Hart-Scott-Rodino waiting period and other conditions. At August 15, 2026 the deal had not closed. **Albertsons litigation.** Kroger's 2022 agreement to acquire Albertsons was blocked by court injunctions and terminated in December 2024. Albertsons is suing Kroger in the Delaware Court of Chancery for the $600 million termination fee, its merger expenses and the lost premium to its shareholders. Kroger denies that it owes the fee and has counterclaimed for Albertsons' own breaches. Trial is scheduled to begin October 19, 2026. **Opioid settlements.** Kroger has agreed to pay: - Up to $1.2 billion to states and subdivisions, and $36 million to Native American tribes, over 11 years. - About $177 million in attorneys' fees over six years. At August 15, 2026 it carried $133 million of this liability as current and $845 million as long-term. Cases by non-participating plaintiffs remain pending. ## Subsequent events *From Forms 8-K filed after the quarter ended August 15, 2026. The second-quarter Form 10-Q, accession 0001104659-26-108926, has no separate subsequent-events note.* - **New store operations chief (Form 8-K, accession 0001104659-26-104763).** On August 31, 2026 Kroger appointed Mark Ibbotson as Executive Vice President and Chief Store Operations Officer, effective September 14, 2026. He was previously Executive Vice President of Central Operations and Realty at Walmart U.S. and Chief Operating Officer of Asda. Separately, Timothy A. Massa, Executive Vice President and Associate Experience Officer, had announced in May that he would retire and serve in his role until September 2026 (Form 8-K, accession 0001104659-26-066818). - **$1.5 billion bond issue (Form 8-K, accession 0001104659-26-113599).** Under a prospectus supplement dated September 28, 2026, Kroger is issuing: - $650 million of 5.800% Senior Notes due 2032. - $850 million of 6.200% Senior Notes due 2036. The supplemental indentures are dated October 5, 2026. Kroger expects to use the net proceeds to refinance debt maturing in October 2026 and for general corporate purposes. - **Second-quarter results and guidance cut (Form 8-K, accession 0001104659-26-106890).** Released September 11, 2026, as described above. - **Scheduled dates.** The Albertsons trial is set to begin October 19, 2026 (Form 10-Q, accession 0001104659-26-108926). Kroger will hold an investor update on October 20, 2026 to present its strategic initiatives and longer-term financial targets (accession 0001104659-26-106890). No filing reports that the Giant Eagle acquisition has closed. Apart from the bond issue above, no filing made after the quarter discloses an acquisition, divestiture or financing.