Executive Summary / Key Takeaways

• Kroger's (KR) core investment thesis is grounded in its resilient omnichannel retail model, leveraging a vast physical footprint and loyal customer base to fuel high-margin alternative profit businesses, enabling strategic reinvestment and sustainable growth despite intense competition.
• Recent performance in FY 2024 and Q1 2025 demonstrates momentum, particularly in pharmacy, e-commerce (15% growth in Q1 2025), and Fresh categories, supported by strong Our Brands performance (outpacing national brands for 7 quarters) and operational improvements like lower shrink.
• Technological investments in data science, AI (e.g., AI-powered sell-through tool), and automation are enhancing personalization, improving operational efficiency (e.g., better in-stock rates, reduced pickup wait times), and driving digital profitability improvement, though the e-commerce channel is not yet profitable.
• Strategic capital allocation prioritizes high-return investments in the core business (30 major store projects planned in 2025, accelerating new store openings beyond 2025) and returning excess cash to shareholders ($5B ASR program underway), while maintaining a strong balance sheet (Net Debt/Adjusted EBITDA 1.69 in Q1 2025 vs. 2.3-2.5 target).
• Outlook for FY 2025 includes identical sales growth without fuel of 2.25% to 3.25% (raised guidance), reaffirmed adjusted FIFO operating profit and adjusted EPS guidance, reflecting confidence in the model's ability to balance investments, manage costs, and drive growth amidst macroeconomic uncertainty and competitive pressures.

The Foundation: A Century of Retail Evolution

The Kroger (KR) Co., established in 1883, has evolved from a traditional grocer into a diversified omnichannel retailer, building its enduring foundation on the essential business of feeding America. Its history is marked by strategic expansions, investments in private label brands, and a recent, significant pivot towards digital capabilities and data monetization. This journey has shaped a business model designed for resilience in a dynamic and intensely competitive retail landscape. At its core, Kroger (KR) operates a vast network of supermarkets, complemented by integrated pharmacies and fuel centers, serving as the primary touchpoint for millions of households. This physical presence, spanning 35 states and the District of Columbia with 2,731 supermarkets as of February 1, 2025, remains a critical asset, providing convenience and driving the traffic necessary to power the company's broader strategic initiatives.

Kroger's (KR) overarching strategy is centered on growing households and increasing customer loyalty. This is achieved by delivering value and convenience through four key pillars: Fresh, Our Brands, Data Personalization, and Seamless. These pillars are not isolated initiatives but interconnected components of a flywheel effect: a strong retail business generates data and traffic, which fuels high-margin alternative profit businesses, and the value created is then reinvested back into the core retail operations to enhance the customer experience and drive further growth.

Strategic Pillars Driving the Flywheel

The four strategic pillars are the engine of Kroger's (KR) value creation model:

• Fresh: Kroger (KR) emphasizes its "Fresh for Everyone" promise, investing in supply chain efficiencies and technology to improve product quality and extend freshness. Initiatives like reducing distribution center dwell time have resulted in tangible benefits, such as bagged salads offering over seven days of freshness. Early pilots of RFID-embedded labels in bakeries show promise in improving inventory insights, freshness, and in-stock levels, leading to higher sales in pilot locations.
• Our Brands: This multi-tiered portfolio, generating over $32 billion in sales in 2024, is a key differentiator. Brands like Private Selection (premium), the core Kroger (KR) brand, and value options like Smart Way compete directly with national brands on quality while offering superior value. Approximately 31% of Our Brands units are produced in Kroger's (KR) 33 food production plants, providing control over quality and cost, which supports margin growth while enabling competitive pricing. Our Brands has consistently outpaced national brand sales growth for seven consecutive quarters, demonstrating strong customer acceptance and loyalty.
• Data Personalization: Leveraging data from over 95% of transactions tied to its loyalty program (serving 63 million households annually), Kroger (KR) utilizes over 20 years of data science investment to create personalized offers and experiences. This enhances customer loyalty and provides the foundation for high-margin alternative profit businesses like Kroger (KR) Precision Marketing.
• Seamless: The Seamless Digital Ecosystem offers customers flexibility through Pickup (available at 2,412 supermarkets), Delivery (from stores, CFCs, or third parties), and Ship options. The goal is to provide "anything, anytime, anywhere with zero compromise." Digital sales exceeded $13 billion in 2024, with Delivery growing 18%. While digital profitability is a key focus area and has shown sequential improvement, the channel is not yet profitable.

Technological Differentiation and Innovation

Technology is not merely a support function at Kroger (KR); it is increasingly a core differentiator and enabler of its strategic objectives. The company's investment in data science capabilities over two decades forms the bedrock of its personalization and alternative profit strategies.

Beyond foundational data analytics, Kroger (KR) is actively deploying advanced technologies with tangible, quantifiable benefits:

• AI-Powered Tools: Kroger (KR) has introduced a generative AI-powered sell-through tool to manage inventory in Fresh and center store departments. This tool uses real-time sales and shipment data to provide insights that improve freshness on shelves and prioritize sell-through, optimizing both sales and margins. While specific quantitative improvements from this tool were not provided, the stated goal is to enhance inventory management and sales/margin optimization. The company plans to extend AI capabilities into improved forecasting and end-to-end inventory management.
• Automation: Investments in automation, particularly within the Kroger (KR) Delivery network and Customer Fulfillment Centers (CFCs) developed through the partnership with Ocado, aim to drive volume growth and improve profitability. These efforts focus on refining demand shape and trade areas to improve customer delivery density. While specific cost savings per order were not quantified, the strategic intent is to narrow the profitability gap between online and in-store shopping, which management believes will generate meaningful operating margin benefits over the next several years.
• RFID Technology: Pilots of RFID-embedded labels on bakery items are providing greater insights into Fresh inventory. Early results show encouraging signs of consistently fresher items and higher in-stock levels, leading to higher sales in pilot locations. The company is evaluating scaling this technology to more stores, contingent on managing the cost per tag.
• Associate Technology: A virtual AI-powered assistant is being used by almost 70,000 associates for over 70 use cases, providing personalized service for HR/associate interactions and real-time access to labor data to ensure fully staffed stores. This is aimed at improving associate productivity and engagement.

The "so what" for investors is that these technological advancements are critical to enhancing Kroger's (KR) competitive moat. Improved data science and AI capabilities directly support the high-margin alternative profit businesses like Kroger (KR) Precision Marketing, which contributed $1.35 billion in operating profit in 2024. Automation and AI in digital fulfillment are essential for improving the profitability of the e-commerce channel, a necessary step for sustainable growth in the digital-first era. Technologies like RFID in Fresh aim to improve operational efficiency and reduce shrink, directly impacting gross margins. While specific ROI or cost savings figures for all initiatives are not disclosed, the strategic intent is clear: leverage technology to drive efficiency, enhance the customer experience, and improve profitability across the ecosystem, positioning Kroger (KR) for long-term growth against technologically advanced competitors.

Competitive Landscape and Positioning

Kroger (KR) operates in a fiercely competitive U.S. retail market, facing pressure from a diverse array of players including mass merchants (Walmart (WMT), Target (TGT)), club stores (Costco (COST)), online retailers (Amazon (AMZN)), deep discounters, and specialty grocers. The proliferation of digital channels and delivery options has further intensified this environment, giving customers more choices than ever.

Compared to its largest rivals:

• Walmart (WMT): Walmart (WMT) is Kroger's (KR) primary competitor in traditional grocery and general merchandise, leveraging immense scale and a cost leadership strategy to offer everyday low prices. While Walmart's (WMT) sheer size provides purchasing power and supply chain efficiencies that can pressure Kroger (KR) on price, Kroger (KR) differentiates through its strong local banners, extensive Fresh offerings, and the depth and quality of its Our Brands portfolio, which often surpasses typical private label offerings. Kroger's (KR) loyalty program and personalized promotions are key tools to build stickiness against Walmart's (WMT) broad value proposition.
• Amazon (AMZN): Amazon (AMZN) competes across both online and increasingly in physical grocery retail (e.g., Whole Foods). Amazon's (AMZN) strength lies in its technological prowess, vast e-commerce infrastructure, and sophisticated logistics. Kroger's (KR) Seamless ecosystem is its direct response, building out its own digital capabilities and fulfillment network. While Amazon (AMZN) has a head start and potentially lower digital operating costs due to scale and technology, Kroger's (KR) advantage lies in leveraging its existing store network for Pickup and its integrated model where digital engagement reinforces in-store loyalty. Kroger's (KR) data science capabilities, while perhaps less extensive than Amazon's (AMZN), are specifically tailored to grocery retail insights, fueling its personalization and retail media businesses.
• Costco (COST): Costco (COST) competes primarily on bulk value and membership loyalty. Kroger's (KR) multi-department and price impact warehouse formats offer some overlap, but Kroger's (KR) core strength is in providing a full-service grocery experience for everyday needs, not just bulk purchases. Kroger's (KR) Our Brands, particularly the value tiers, compete on price, while its premium tiers offer quality comparable to or exceeding national brands, providing alternatives to Costco's (COST) Kirkland Signature.

Kroger's (KR) competitive positioning is thus one of leveraging its established physical presence and deep customer relationships (built over decades through local banners and loyalty programs) to build out a competitive digital offering and monetize its unique data assets. Its integrated model, where the grocery business fuels alternative profits that are reinvested, provides a structural advantage not easily replicated by pure-play online retailers or discounters. However, maintaining competitive price gaps, particularly against mass merchants, and achieving profitability in the expanding digital channel remain critical challenges. The company's focus on cost optimization and productivity initiatives is essential to fund necessary price and wage investments while preserving margins in this competitive environment.

Financial Performance and Health

Kroger (KR) delivered solid financial results in fiscal year 2024 (ended Feb 1, 2025), demonstrating the resilience of its model amidst a challenging macroeconomic backdrop characterized by cautious consumer spending and persistent, though moderating, inflation. Total sales decreased slightly to $147.1 billion in 2024 from $150.0 billion in 2023, primarily due to decreased fuel sales and the sale of Kroger (KR) Specialty Pharmacy (KSP). However, identical sales excluding fuel increased 1.5% in 2024, driven by growth in households, Health & Wellness, and digital sales.

Profitability metrics showed strength in 2024. FIFO gross margin rate, excluding fuel and certain items, increased 32 basis points, benefiting significantly from the sale of KSP (a low-margin business), strong Our Brands performance, and lower shrink. Excluding the impact of KSP, the FIFO gross margin rate still increased by 14 basis points, indicating underlying operational improvements. Operating, general and administrative (OGA) expenses, excluding fuel and adjusted items, increased 31 basis points, partly due to the KSP sale and investments in associates, but also reflecting broad-based improvements from cost savings initiatives. Adjusted FIFO operating profit for 2024 was $4.7 billion. Net earnings attributable to Kroger (KR) Co. increased to $2.7 billion ($3.67 per diluted share) in 2024 from $2.2 billion ($2.96 per diluted share) in 2023. Adjusted net earnings per diluted share, excluding adjusted items and the 53rd week in 2023, decreased 2% to $4.47, primarily impacted by lower fuel earnings and adjusted FIFO operating profit trends excluding fuel.

The momentum continued into the first quarter of fiscal year 2025 (ended May 3, 2025). Identical sales without fuel increased a strong 3.2% (excluding adjustment items), led by pharmacy, e-commerce (15% growth), and fresh sales. FIFO gross margin rate, excluding fuel and adjustment items, increased 79 basis points, with 33 basis points of improvement excluding the KSP sale. OGA rate, excluding fuel and adjustment items, increased 63 basis points, with a 29 basis point impact from an accelerated multi-employer pension contribution; excluding these effects, the underlying OG&A rate was relatively flat. Adjusted EPS in Q1 2025 was $1.49, a 4% increase compared to the prior year quarter (excluding adjustment items).

Kroger (KR) maintains a strong balance sheet and generates robust free cash flow. Net total debt to adjusted EBITDA stood at 1.69 at the end of Q1 2025, well below the target range of 2.3 to 2.5. This financial strength provides significant flexibility for strategic investments and returning capital to shareholders. In 2024, Kroger (KR) returned $5.1 billion to shareholders through dividends and share repurchases, including commencing a $5.0 billion Accelerated Share Repurchase program following the termination of the Albertsons merger. Capital investments totaled $3.6 billion in 2024, focused on enhancing stores and digital capabilities, with plans to complete 30 major store projects in 2025 and accelerate new store openings beyond 2025.

Outlook and Guidance

Kroger's (KR) outlook for fiscal year 2025 reflects confidence in its ability to execute its strategy and deliver growth despite ongoing macroeconomic uncertainty. The company raised its guidance for identical sales without fuel to a range of 2.25% to 3.25%, signaling positive momentum, particularly from Q1 results. Management expects identical sales without fuel to be roughly at the midpoint of this range in the second quarter and consistent throughout the year, building slightly as volumes improve.

The company reaffirmed its full-year guidance for adjusted FIFO operating profit and adjusted net earnings per diluted share, expecting adjusted EPS in the range of $4.60 to $4.80. This implies confidence in balancing investments in price and wages with margin enhancement efforts from Our Brands, alternative profits, and productivity gains. Management expects underlying FIFO gross margin and OG&A rates (excluding fuel, adjustment items, and KSP sale impact) to remain relatively flat year-over-year.

Key assumptions underpinning the 2025 outlook include expected inflation of 1.5% to 2% (excluding tariff effects), continued cautious consumer spending, and fuel results being a headwind. Net interest expense is expected to be between $650 million and $675 million, reflecting the higher debt load from the 2024 issuance (net of redemption). Capital expenditures are expected to remain elevated as the company invests in store projects and digital capabilities. The guidance also contemplates the completion of the $5.0 billion ASR program by Q3 2025 and resuming open market share repurchases under the remaining $2.5 billion authorization by year-end.

Risks and Challenges

While Kroger's (KR) model demonstrates resilience, it faces significant risks that could impact its performance and the investment thesis:

• Intense Competition: The proliferation of competitors across formats (mass, club, online, discount) and channels (in-store, digital) creates continuous pressure on pricing, margins, and market share. Failure to adapt quickly to evolving customer preferences or competitive actions could adversely affect results.
• Macroeconomic Uncertainty: Economic conditions, including inflation volatility, interest rates, employment levels, and consumer confidence, directly impact consumer spending habits and demand for products, particularly affecting budget-conscious households.
• Labor Relations: A majority of Kroger's (KR) workforce is unionized, with approximately 350 collective bargaining agreements. The ability to negotiate sustainable contracts that balance wage/benefit investments with affordability and business profitability is crucial. Potential work stoppages or inability to control labor costs could materially affect financial results.
• Digital Profitability: Despite progress, the e-commerce channel is not yet profitable. Achieving profitability requires significant volume growth, automation efficiencies, and improved delivery density to offset the inherent higher costs of online fulfillment. Failure to do so could pressure overall margins.
• Supply Chain Disruptions: Reliance on a wide variety of domestic and international vendors exposes Kroger (KR) to risks from labor disputes, natural disasters, geopolitical events, or supplier financial distress, which could interrupt product supply and increase costs.
• Cybersecurity and Data Privacy: Dependence on complex IT systems and the collection of sensitive customer/associate data expose Kroger (KR) to cyber-attacks and data breaches. Evolving threats, including those potentially amplified by AI adoption or geopolitical conflicts, require continuous investment and vigilance. Failure to protect data or comply with changing privacy regulations could result in significant costs, litigation, reputation damage, and loss of customer trust.
• Multi-Employer Pension Obligations: Contributions to underfunded multi-employer pension plans are expected to increase, potentially impacting financial results. While not a direct liability, withdrawal liabilities could be triggered if Kroger (KR) exits certain markets.
• Litigation: Ongoing legal proceedings, including opioid litigation and the litigation with Albertsons following the terminated merger, pose risks of substantial losses or costs that could adversely affect financial results.

Conclusion

The Kroger (KR) Co. stands as a formidable player in the U.S. retail landscape, leveraging its extensive physical footprint, trusted brands, and loyal customer base to power a diversified value creation model. The core investment thesis rests on the company's ability to translate the traffic and data generated by its traditional grocery business into high-margin growth through alternative profit streams, enabling strategic reinvestment back into the core. Recent performance underscores this model's resilience, with strong results in key growth areas like pharmacy, e-commerce, and Fresh, supported by technological advancements aimed at enhancing efficiency and personalization.

While the competitive environment remains intense and macroeconomic uncertainty persists, Kroger's (KR) strategic focus on its four pillars, coupled with disciplined capital allocation towards high-return projects and shareholder returns, positions it for continued growth. The outlook for 2025, including raised sales guidance and reaffirmed profit expectations, signals management's confidence in navigating these challenges. Investors should monitor Kroger's (KR) progress in improving digital profitability, managing labor costs, and effectively leveraging its technological capabilities to maintain its competitive edge and deliver on its long-term value creation targets. The company's strong balance sheet provides a buffer, but successful execution on strategic initiatives and risk mitigation will be key to unlocking further value.