The largest U.S. supermarket chain operator, Kroger (KR.US), delivered a mixed report card for its latest fiscal quarter. While sales surpassed market expectations, highlighting the essential nature of grocery demand for budget-conscious consumers, rising transportation costs, falling egg prices, and proactive price reduction strategies squeezed the company's profitability.
According to data released by Kroger on Thursday, first-quarter revenue reached $46.12 billion, an increase of approximately 2% year-over-year, exceeding the average analyst estimate of $45.59 billion. Excluding fuel, same-store sales grew by 1%, slightly better than the 0.96% increase anticipated by Wall Street. Net profit was $903 million, or $1.46 per share, up from $866 million, or $1.30 per share, in the same period last year. However, adjusted earnings per share, excluding one-time items, were $1.58, still one cent below market expectations.
Profitability Under Pressure
The company stated that the slight decline in gross margin was primarily due to a higher proportion of fuel sales, elevated transportation costs, and declining egg prices. These pressures were only partially offset by an improved pharmacy business mix, enhanced profitability in the digital retail strategy, and procurement optimizations. Although the gross margin (22.7%) faced pressure, down from 23% a year ago, the company's operating profit still grew due to lower depreciation and amortization expenses, even as administrative costs increased.
Maintained Outlook
Looking ahead, Kroger maintained its full-year guidance. For fiscal 2026 (excluding fuel operations), the company expects same-store sales growth between 1% and 2% and earnings per share in the range of $5.10 to $5.30.
Competitive Landscape
Facing a multi-year period of high prices, American consumers are becoming increasingly budget-conscious, shifting more towards store brands and discounted items. Meanwhile, recent spikes in gasoline prices due to the conflict in Iran have further strained household budgets, with U.S. inflation accelerating to its highest level in over three years in May. In the food sector, prices for beef, coffee, and some agricultural products continue to rise, prompting lower-income groups to focus more on value, while affluent consumers maintain their spending.
In this environment, CEO Greg Foran, who took the helm in February, has played an aggressive price card. He stated last month plans to implement Kroger's most significant price reductions in years to compete for greater market share against rivals like Walmart (WMT.US), Costco (COST.US), and Amazon (AMZN.US). The company is currently focusing on price cuts across multiple categories and improving service friendliness and speed to pave the way for long-term competition. Retail peers are not standing idle either; Walmart and Costco have recently emphasized that they will continue to prioritize value, attracting deal-seeking customers with competitive prices.
"We are pleased with our first-quarter results, but we know there is much more work to do," Foran said in a statement. Following the earnings release, Kroger's stock experienced significant volatility in pre-market trading and was down nearly 8% at the time of reporting.