Kroger Has Funded the Turnaround Now Sales Must Respond

The Kroger Co. (KR) | Second Quarter 2026 | September 11, 2026

Hardik Shah

Kroger's second quarter showed that the company can absorb a weak sales environment, invest in price and still protect annual profit. It did not yet show that those investments are producing stronger grocery demand. The distinction sets up a clean test for Greg Foran's turnaround: cost savings have created room to act, but unit growth and basket expansion must eventually carry more of the earnings case than share repurchases.

The sales headline understates the business but demand still softened

Identical sales excluding fuel increased just 0.2%, down from 3.4% a year ago. That figure absorbed 265 basis points of specific headwinds: 140 basis points from Inflation Reduction Act changes to pharmacy reimbursement, 60 basis points from the shift toward lower-priced generic prescriptions, 30 basis points from egg deflation and 35 basis points from the Cyclospora outbreak's effect on produce.

Adding those items back mechanically would put growth near 2.9%, but that is not a clean measure of underlying demand. The pharmacy effects reduce reported revenue without reducing profit, while egg deflation changes price rather than units. Cyclospora was a temporary disruption concentrated late in the quarter. Grocery units still decelerated from the first quarter, traffic increased only slightly and ticket declined as customers bought fewer items per trip. Management also reduced full-year identical-sales guidance from 1%-2% to 0.2%-0.8%.

The quarter therefore looks healthier than the headline comp and weaker than a simple adjusted comp suggests. Kroger maintained its share advantage over Circana's traditional-grocery benchmark, even with a heavier fresh mix that likely made Cyclospora more damaging. It has not yet converted that relative performance into convincing absolute growth.

Profit resilience came from several sources

Kroger held full-year adjusted FIFO operating-profit guidance at $5.0-$5.2 billion despite the lower sales outlook. FIFO gross margin excluding fuel, rent, depreciation and amortization increased 13 basis points as e-commerce profitability, retail media, pharmacy mix and sourcing savings outweighed price investment, higher shrink and transportation costs. Adjusted e-commerce sales grew 20%, and Kroger reported a second consecutive quarter of profitable e-commerce growth. Kroger Precision Marketing profit increased 24%, its strongest growth since 2021.

The result demonstrates real operating flexibility, although the 5% increase in adjusted EPS overstates the underlying earnings performance. Adjusted net earnings declined 4% to $667 million, and adjusted FIFO operating profit slipped from $1.091 billion to $1.076 billion. Diluted shares fell nearly 9%, from 665 million to 608 million, following $1.2 billion of repurchases in the first half. Buybacks turned a decline in adjusted earnings into per-share growth.

Cost savings still did useful work. They funded lower prices while helping protect gross margin, even as the operating expense rate rose 33 basis points because of wage investment, healthcare costs and sales deleverage. Foran said the opportunities in sourcing, procurement, shrink, out-of-stocks and organizational efficiency are larger than he expected when he arrived. That gives Kroger time to rebuild the customer proposition without forcing an abrupt margin reset.

Lower prices create an intentional delay in reported sales

Kroger's value plan is changing the balance between base shelf prices and promotions by geography. The near-term arithmetic works against reported sales: when the price of an item falls, revenue declines before customers recognize the change and add more items to their baskets. Foran acknowledged that well over half of customers do not understand Kroger's current promotional package. Changing price perception will take longer than changing prices.

Early evidence from the markets receiving value investment is encouraging. Those stores moved against the companywide decline in basket size, and Kroger's base shelf-price position improved relative to competitors. Management has not disclosed the investment, price gaps or unit response, so investors cannot yet judge the return. A 13-basis-point gross-margin increase shows that Kroger funded the program; it does not establish that the program is working with customers.

Merchandising offers a second route to better baskets. Private Selection sales rose more than 14%, total own-brand penetration gained roughly 50 basis points, and prepared meals, deli and bakery gained unit and dollar share. These categories combine convenience with a price-quality proposition that does not depend on blanket discounting. They also carry an optical cost: customers shifting from national brands to Kroger brands can reduce reported revenue while improving gross profit.

Kroger enters the October investor update with the funding side of its plan in better shape than the sales revision implies. The next proof is customer behavior. Unit growth, items per basket and share gains in the geographies receiving price investment will show whether savings are financing a durable retail improvement or merely supporting profit while demand remains soft.