Kroger Posts 12% EPS Gain in Fiscal Q2

Kroger (KR 1.69%), the major U.S. supermarket operator, released its second quarter earnings on September 11, 2025 for the period ending August 16, 2025. The most notable news from this earnings report included strong identical sales growth excluding fuel of 3.4%, a marked improvement in margin, and a tight but positive adjustment to full-year sales and profit guidance. In summary, the period showed concrete operational gains, mostly in core retail and digital channels, despite headline sales remaining flat year over year.

Understanding the Business and Recent Focus

Kroger is a large grocery retailer with thousands of food stores across the United States. It operates supermarkets, multi-department stores, and a growing digital platform for e-commerce grocery shopping. Its business combines traditional food retail with a growing pharmacy, private label, and digital sales component.

The company’s current focus is on expanding digital and e-commerce, growing its private brands, and investing in operational efficiency. It emphasizes its Fresh offering, known as high-quality produce and prepared foods, and leverages customer data to provide personalized shopping. Key success factors include driving loyalty, optimizing costs, managing labor, and adapting store networks to changing shopping habits.

Quarter Review: Financial and Operational Highlights

During the quarter, the company delivered a year-over-year improvement in profitability, as measured by adjusted EPS. The identical sales metric, which excludes fuel and measures sales in stores open at least a year, rose to 3.4%, a notable acceleration from the 1.2 % gain in the same period last year. Excluding fuel and the specialty pharmacy divestiture, overall sales increased 3.8%. This performance allowed management to tighten and raise its full-year identical sales growth guidance to 2.7–3.4%, up from 2.25–3.25% previously.

Digital expansion remained a highlight, with e-commerce sales growing 16% over the same quarter last year. This continued the momentum from the prior quarter, when digital sales increased 15%. The company attributed gains to more household participation and greater order volumes. Its partnership with Instacart, a leading third-party provider of grocery pickup and delivery services, is a key part of Kroger’s digital strategy. Management consolidated e-commerce operations to improve profitability and scale of these offerings.

The sale of Kroger Specialty Pharmacy, a business focused on complex medication management, was a material one-time event that reduced sales; FIFO gross margin increased by 39 basis points, with 48 basis points of that increase attributed to the sale. The company's gross margin increased to 22.5%, up from 22.1% a year prior, with most of the increase attributed to the divestiture, lower supply chain costs, and shrink (or inventory loss). Pharmacy sales led company growth, although pharmacy is lower margin than core grocery so it put some pressure on company-wide margins. A higher Last-In-First-Out (LIFO) inventory charge, which reflects rising product costs, signaled persistent inflationary effects.

Operating profit improved by 10.9% year-over-year on an adjusted FIFO (First-In-First-Out) basis. The metric removes certain accounting adjustments and gives a clearer picture of profitability in the core business. The company also made progress on cost controls: its operating, general, and administrative (OG&A) expense rate (excluding fuel and adjustment items) fell by 5 basis points compared to the prior year, even with a temporary increase from the pharmacy sale. Management cited improved productivity and fewer non-recurring charges for this result.

The company continued to streamline its business model by closing underperforming stores, with about 60 closures planned over 18 months and new openings expected in 2025. No major changes to ESG (environmental, social, and governance) or climate disclosures appeared in the release.

On the financial side, debt leverage increased sharply compared to a year ago. Net total debt to adjusted EBITDA, a common measure of leverage comparing debt to earnings before certain expenses, rose to 1.63 times, up from 1.24 times. However, this ratio remains within the management’s tolerance range. After completing a significant $5 billion accelerated share repurchase, the company plans to resume regular buybacks under its remaining $2.5 billion authorization. The quarterly dividend was raised 9.4% to $0.35 per share, compared to $0.32 in the prior year period.

Looking Ahead: Outlook and Key Watch Points

Kroger adjusted its guidance for fiscal 2025, moving the lower end of its sales, profit, and earnings ranges upward. Management now expects identical sales growth excluding fuel of 2.7% to 3.4% for FY2025. Full-year operating profit (adjusted, non-GAAP) is forecast at $4.8 billion to $4.9 billion for FY2025, tightening from the previous $4.7–$4.9 billion range. Adjusted earnings per share are projected at $4.70 to $4.80 for FY2025, up from the prior lower bound of $4.60. Free cash flow and capital investment targets remain unchanged. Management reduced its full-year adjusted tax rate expectation to 22% from 23% for FY2025.

As the year continues, factors to watch include the profitability of the pharmacy business, which generates strong sales but has a lower margin impact; ongoing digital and e-commerce expansion, where segment profitability remains undisclosed; and the financial effects of store optimization efforts. Investors may also track leverage following major capital returns and the company’s stated focus on cost reduction and human resources. Alternative profit areas, like data-driven retail media, remain a strategic target but did not see quantified disclosure in this report.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.