Kroger Aktie

Good morning, and welcome to the Kroger Co. First Quarter 2026 Earnings Conference Call. [Operator Instructions], Please note, this event is being recorded. I would now like to turn the conference over to Rob Quast, Vice President, Investor Relations. Please go ahead.

Good morning. Thank you for joining us for Kroger's First Quarter 2026 Earnings Call. I am joined today by Kroger's Chief Executive Officer, Greg Foran; and Chief Financial Officer, David Kennerley.

Before we begin, I want to remind you that today's discussions will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger company assumes no obligation to update that information. After our prepared remarks, we look forward to taking your questions. In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to 1 question.

I will now turn the call over to Greg.

Thank you, Rob, and good morning, everyone. I said it on day 1, and it's still true today. This is the best job in retail, full stop. I'm a believer in grocery, physical and digital. It's essential. It's resilient. People want fresh food. They want it close to home, and they want it at a price that works for them, and supermarkets done well is a fantastic business.

Now Kroger, we've got terrific assets. We're outperforming many traditional grocery competitors, and we're proud of that, but beating other grocers isn't the same as leading the industry. Customers today are shopping across all channels with more of the spend going outside of traditional grocery. But I don't see that as a problem. I see it as an opportunity, right industry, right moment, right foundation. The runway in front of this business is significant. We have what we need, now we need to execute.

Over my first 100 days, I've been in the business every week in stores, manufacturing plants, distribution centers and offices. I've spent time with associates, customers and suppliers and with many of you, and I've walked our competitors because you can't lead in this industry without understanding it from every angle. So let me give you my assessment. First, our operating costs have been growing faster than our sales. That's not sustainable. And frankly, it's not acceptable. Taking costs out of this business is not optional. It's the starting point for everything else we want to do. Second, the way we operate behind the stores needs to improve. We need to move faster, make decisions more quickly and get more out of the assets and the talent we already have. Third, our execution in stores and online needs more consistency. When we operate well, we perform well. We attract households, grow sales and deliver strong earnings. But when execution slips, we fall short of our potential. And today, the gap between our best stores and the rest of the fleet needs to improve. And closing it is one of our biggest near-term opportunities.

On top of that, we have not been opening in our stores. Competitors have continued to grow their footprint while we stepped back. Our existing footprint is 1 of our strongest assets, but standing still in store growth means standing still in market share. The good news is we have started to ramp our pipeline thoughtfully focused on the markets and formats that can generate the strongest returns. And finally, we have opportunities to strengthen our price position and make it simpler. Customers are being more deliberate with their spending and at times, shopping us selectively. We're getting too many promotional trips and not enough of the full basket.

Our ambition is clear, to be America's best grocer. We're going to lead with what we are, a great grocer focused on food, and we're going to win by doing it better than anyone else. To become America's best grocer, there are 5 things we need to get right, priorities that connect to every associate in every store every day. This is what we call The 5 Fs. Let's start with Fresh. Fresh is the single biggest reason customers choose a grocer. If the produce isn't right, if the protein disappoints, if it doesn't last at home, we've lost them. We're raising our standards and measuring freshness the way customers experience it, not just on our shelves, but in their homes. Fast, customers are busy. When we're out of stock, when the checkout is slow, when the promotion is too complicated, that costs us trips. Faster plays just as much online as it does in our stores. Quick trips in store, fast delivery at home, a perfect order on time every time. For you, we have more data and more customer insight than just about anyone in this industry. We need to use it better. Personalization, our customers actually feel and the offers they get and the experience they have in the trip itself. Friendly, our associates are one of our biggest competitive advantages, and we're going to act like it. Friendly is a hard metric. When we measure it and manage to it, it improves the customer experience. That starts with how we invest in our associates, better training, simpler tools and the support they need to do their best work. Affordable. And yes, I know it doesn't start with an F, but it belongs on the list. We have opportunities to sharpen our pricing and make value simpler for customers. Over time, our promotions have gotten too complicated and our price position has not kept pace where it needed to.

Let me be clear on what this means. We do not need to be the lowest-priced retailer. We need to be more competitive, more consistent and easier for customers to understand. When a customer is deciding where to shop, we want more of them choosing Kroger more often because the value is clear, the experience is great and the trust is there. To do this, we do not need a onetime reset. Every dollar we invest in customer value we earn through cost savings and efficiency. That's the standard we're holding ourselves to. Over time, we'll move towards simpler, more consistent everyday value. We will still be promotional, that is part of who we are, but sharper and easier for customers to understand. That requires discipline, and here's where we're pushing to fund that.

On cost of goods, we will press harder on supplier negotiations and lean further into direct sourcing. On goods not for resale, we will remove complexity and waste in addition to buying better, and we need to operate more efficiently. That means fewer organizational layers, smarter ways of working, standing up our Kroger capability center and applying AI across the business.

Let me turn to e-commerce and media, 2 businesses that are increasingly central to how we win and how we grow. Starting with e-commerce. Most of the growth in grocery today is happening online. That's where the customer is moving and that's where we have to lead. Our omnichannel customers spend nearly 2.5x more with us than our in-store-only customers. The good news is that we have the right assets to do it, a strong store footprint, deep customer data and a fresh offering that travels well into the digital basket.

Now a strong e-commerce business does something else. It powers our media business. Kroger Precision Marketing is a high-margin business built on first-party data that very few retailers can match. What sets us apart is the depth of our data. 95% of all transactions are tied to a loyalty card backed by over 20 years of history. That means we can measure actual purchase behavior, not just intent. And that's increasingly valuable to brands and advertisers. The fundamentals of this industry are moving in our direction. We operate the technology layer closest to the customer giving us a distinct advantage in how we engage and monetize those relationships. As data and direct customer relationships become the most valuable currency in advertising, those with scale and trusted customer connections will be the long-term winners. And that gives us real confidence in our ability to lead.

Over time, this will become an even more important driver of both growth and margin.

I want to spend a few moments on culture. None of this work happens without the right people moving at the right pace. Through my first 100 days, 1 thing has become clear, we need to move with more speed. We need to be more intentional and smarter about how we work at every level of this organization, and that starts with me. We are building a culture where the work is never done, where we improve the business every week.

Before I turn to the quarter, let me say a word about what you can expect from us this year. We are balancing 2 things at once, delivering results in the short term while making the changes required to improve the business long term, both matter, and we intend to do both. We will be transparent with you every step of the way on what's working, what isn't and what we're doing about it.

With that as the backdrop, let me turn to what we're seeing in the business, starting with the customer. The customer is under pressure, higher gas prices and reduced SNAP benefits and squeezing budgets, customers are managing spend carefully and shopping with real intent. That pressure is showing up in the market. Food at home growth decelerated 100 basis points compared to the last quarter. The encouraging news is that our work on affordability is starting to resonate, and you can see it in the data. Traffic is up. Customers are coming through our doors more often, which tells me our value message is starting to land. And our loyal households have now grown for 17 consecutive quarters.

We've started to pull away from the middle of the pack, both in units and in dollars, and had our best performance against Secarna's rest of market, a benchmark of traditional grocery competitors in over 3 years. That's a meaningful shift, and it tells me that the team is doing the right things in the right way.

We delivered identical sales, excluding fuel, of 1%, led by a strong performance in E-commerce, Fresh and Our Brands. 3 areas I'm spending a lot of time on. Our Brands continue to be a real strength. This quarter, Our Brands gained share and outpaced national brands by 175 basis points even with the headwinds from deflation in dairy with strong momentum in Simple Truth and Private Selection. New items like the Private Selection sparkling mineral water and our globally inspired frozen meals are resonating with customers. As a business, we're changing our mindsets to think more like item-level merchants. Customers don't buy assortment, they buy items, the garlic and herb chicken, the Black Diamond Water Melon, the Guatemalan Antigua, coffee, every item has to earn its place on the shelf and every item is an opportunity to delight a customer or lose one. That's a discipline we need to use in our brands and frankly, across the entire store.

E-commerce also performed well, growing 19%, led by delivery. We improved perfect order rates by 8% and attracted a record number of new households. And on the back of that progress, we had a milestone we've been working toward for years. Our e-commerce business, including media, turned profitable this quarter. That's a real step-up and we intend to keep building on it. What gives me confidence this is sustainable is the work behind it, particularly our shift to more store-based fulfillment, which is improving the economics of the business as we scale. Our intent is to grow this business faster than the market over time.

On costs, we are moving with urgency. We delivered savings ahead of plan this quarter, and I can tell you we're just scratching the surface. There is more to come. Margin performance was solid. We balanced productivity and savings with investments to grow. We saw some unexpected pressure in transportation from higher diesel costs that wasn't built into our original expectations for the year, but it's a manageable headwind, and we're confident we can work through it.

Stepping back, this quarter was a step in the right direction. We're making progress on the fundamentals. The strategy is coming into focus, and the team is energized about what's ahead. We're building toward a clear long-term framework we plan to share at our investor update on October 20. Between now and then, we'll keep you posted on progress.

Let me leave you with this, right industry, right moment, right foundation. The opportunity is enormous, and we know the work. First, we break clear of the pack, then we close the gap to the leaders. I'm encouraged because the work is already underway and we are seeing positive signs. But the work is never done, better every day, better every week. We have what we need, now we go execute. We will now turn the call over to David.

Thank you, Greg, and good morning, everyone. As you just heard, Greg is setting a clear strategic direction, and my job is to show you how the financial model supports it. And this quarter, it did. Kroger delivered a solid first quarter, reflecting continued progress in our core grocery business and strong growth in e-commerce. We are executing well in a dynamic environment. We are investing in price with discipline, fully funded through cost savings while maintaining a strong focus on margin performance. This quarter, we achieved identical sales growth without fuel of 1%. Sales growth was led by strong performance in e-commerce, Fresh and Our Brands. Importantly, grocery sales again represented a larger portion of our overall mix, reinforcing improving underlying trends in the core business.

Pharmacy sales were led by continued growth in GLP-1s and core scripts. That said, identical sales without fuel growth of 1% included a 130-basis-point headwind to the total company from the Inflation Reduction Act and an additional 40-basis-point headwind to the total company from the accelerating shift from brand to generic prescriptions. Despite these top line pressures, pharmacy profit grew ahead of expectations.

Food inflation came in at the low end of our expectations, down sequentially from the fourth quarter. Egg deflation was a meaningful headwind to identical sales without fuel, representing 64 basis points of pressure.

Our first quarter results reflect improving underlying volumes relative to the market, partially offset by pressure from lower inflation and pharmacy-related headwinds. Looking ahead, we expect inflationary pressure to increase as the year progresses, reflecting the broader macro environment. Against this backdrop, our priority remains clear: delivering value for customers, working with suppliers to optimize costs, narrowing price gaps versus competitors and managing our margins responsibly.

Our FIFO gross margin rate, excluding rent, depreciation and amortization, fuel and adjustment items, decreased 9 basis points in the first quarter compared to the same period last year. The change in rates was primarily driven by higher-than-expected transportation costs, the deflationary impacts from eggs and planned pricing investments. These headwinds were partially offset by favorable mix in pharmacy, improved e-commerce profitability and sourcing benefits.

Transportation was an unexpected headwind, resulting in 15 basis points of pressure in the quarter as higher oil prices impacted our fuel costs. We are managing this closely and expect some pressure to persist while oil markets remain elevated. Despite these near-term pressures, we continue to expect our FIFO gross margin rate to be positive on a full year basis with cost-saving initiatives ramping up throughout the year.

Our operating, general and administrative rate, excluding fuel and adjustment items, increased 16 basis points in the first quarter compared to the same period last year. The increase primarily reflects intentional investments in our associates, additional store hours, training and new uniforms. These pressures were partially offset by lapping higher multi-employee pension contributions from a year ago and continued progress on our ongoing productivity initiatives.

Our adjusted FIFO operating profit in the quarter was $1.5 billion. Adjusted EPS was $1.58, reflecting 6% growth compared to last year.

A core pillar of our long-term strategy is modernizing how we operate to move faster and create a more efficient cost structure that supports both margin performance and enables us to invest into more value for customers. In the first quarter, we delivered COGS savings 30% ahead of our plan. We see meaningful runway ahead across both COGS and goods not for resale, with savings expected to build throughout the balance of year and accelerate beyond. Combined with disciplined reinvestment, this positions us to drive margin expansion over time.

While we are committed to managing margins on an annual basis, quarterly results will fluctuate based on the timing of investments and savings initiatives. We look forward to sharing more specific long-term targets at our investor update this fall.

Fuel results were better than anticipated this quarter, reflecting favorable fuel margins driven by elevated volatility in global oil markets and strong volume performance relative to the industry. While our gallons were down slightly versus last year, our industry-leading fuel rewards program enabled us to outpace industry benchmarks by more than 400 basis points. During the quarter, we expanded fuel reward promotions, helping customers save at the pump in an environment where value matters more than ever, while driving incremental traffic to our stores. As a result, fuel reward redemptions were up 10% compared to last year.

As noted earlier, we delivered a strong e-commerce performance in the quarter. Growth was led by convenience orders delivered in under an hour, which represented approximately 50% of our digital growth. Our new third-party partnerships with DoorDash and Uber Eats allow us to leverage our store network, provide faster delivery and reach new customers. We gained share across every third-party platform where we operate, another proof point that we are beginning to pull away from traditional grocery.

As part of the continued evolution of our hybrid fulfillment model, we closed 3 fulfillment centers at the end of the last quarter. In markets where we have a store presence, we retained nearly all of those households and successfully converted them to store-based delivery and pickup. These actions are already translating into better profitability. Our e-commerce business, including media, became profitable this quarter ahead of schedule.

We expect profitability to accelerate through the remainder of this year and continue improving beyond 2026, and as we scale store-based fulfillment, expand media and reduce our cost to serve. Together, these levers position e-commerce to become a larger contributor to margin expansion over time.

Our e-commerce results are also creating momentum for our media business, which delivered over 20% growth this quarter. This combination of Kroger's customer data, loyalty ecosystem and expanded reach through partners is creating new opportunities for brands to engage customers in more targeted and effective ways.

Recently, we deepened several partnerships. With Google's Display and Video 360 platform, advertisers can now use KPMs retail signals to reach audiences across YouTube and YouTube TV with SKU level conversion reporting available for the first time. We're also the first retail media network set to launch a self-service collaboration with TikTok, giving brands direct access to KPM audiences within 1 of today's most influential platforms.

Looking ahead, we are expanding our AI-powered capabilities to support real-time optimization predictive budget allocation and faster audience creation, positioning AI as a key enabler of both performance and scalability. We're encouraged by the progress we are seeing in media and believe we remain in the early stages of a long-term growth opportunity.

None of the progress we are making would be possible without our associates who are at the heart of everything we do. A great customer experience begins with a motivated, engaged and well-supported team, which is why we continue to invest in our people. Beyond competitive wages and benefits this quarter, we invested in more store hours, additional training to better support our customers and new uniforms so our associates are easily recognizable on the floor, all to create a great shopping experience.

We are investing in better technology that helps our associates grow in their careers, work more efficiently and spend more time on the value-added activities our customers notice most. These investments not only strengthen the experience we deliver in our stores and online, they also improve productivity and support the long-term growth of our business.

Now turning to capital allocation and financial strategy. Kroger generated strong adjusted free cash flow this quarter, driven by our operating results. Free cash flow is important to our model, providing liquidity to our operations and allowing us to maintain a strong balance sheet. At the end of the first quarter, Kroger's net total debt to adjusted EBITDA was $1.75 million compared to our net total debt to adjusted EBITDA target ratio range of 2.3 to 2.5. Over time, we expect to move back toward our target leverage ratio. We view this flexibility as a strategic asset. It gives us optionality to invest in high-return opportunities while maintaining our commitment to investment-grade credit.

Our disciplined capital allocation continues to fuel our performance as we balance investments in growth opportunities, all while maintaining a strong financial foundation. Our capital allocation framework is grounded in a focus on improving ROIC, which is guiding every investment decision we make. We are confident that this focus will enable us to generate strong long-term returns to our shareholders.

I would now like to provide some additional detail on our outlook for the rest of the year. We are pleased with our first quarter performance, which reflects continued momentum in our core grocery business and strong performance in e-commerce. Given our outlook for the remainder of the year, we are reaffirming our full year guidance. Our confidence in the full year outlook is supported by continued progress on cost savings, improving e-commerce profitability, growth in media and disciplined reinvestment in value. For the second quarter, we expect identical sales without fuel to be roughly in line with the first quarter. This reflects continued pharmacy headwinds from the accelerating shift from brand to generic prescriptions as well as ongoing pressure on consumer spending.

We expect adjusted net earnings per diluted share to be in line with last year in the second quarter, with growth accelerating in the back half as our cost-saving initiatives continue to ramp.

In closing, we are setting a high bar for this business, and our financial model is built to support it. We are pleased with this quarter's results, and we are confident in our plans. We look forward to laying out a broader financial framework at our investor update in October.

With that, I will turn the call back to the operator to begin the question-and-answer session.

[Operator Instructions] Your first question comes from the line of John Heinbockel from Guggenheim Securities.

Execution gap between really good stores and laggards, how do you think about closing that? And how impactful would that be, right, to market share? And then lastly, do you have -- what's your thought on food volumes? And what is an acceptable food volume performance for this business?

Yes. John, it's Greg. I would say that I'm guessing over the last sort of about 15, 16 weeks, I've probably now gotten to well over 100 of our stores and many of our competitors. I would say that as a rough rule of thumb, I would say that 2 out of 5, I would find in very good condition. Another 2 out of 5 that are in moderate condition, and there's generally 1 out of 5 where we could improve the performance. So we just don't focus on that 20%, we look at actually the other 2 out of 5, where we can improve. The way you fix that is by basically getting out into the business. You spend time with the presidents in each division. You spend time with the Vice Presidents, you spend time with the district managers, you walk stores, you use the data that's available as well. We have some good data on stores. But basically, you're out there and you're seeing what's happening and you're encouraging people and making sure that we stay on top of it.

It's interesting when you come across a store that has some challenges and that's the nature of this business, and it's been like that in almost 50 years that I've been doing it, it's amazing how quickly you can get it turned around and the impact it has on sales. I was in a store the other weekend. It wasn't in great shape. It had been running negative comp sales. And in the space of basically some hard work over the day by the team, they turned it into some reasonably healthy positive comps. So it makes a difference when you run a good store.

Your comment on volumes, maybe I could just get a little bit more color on what you were after there?

Can take out pharmacy food volumes units, right? I think most conventional food retailers run negative, right? And obviously, you certainly don't want to be there.

Yes. No, we don't. And we've made comments in the script about starting to pull away from that traditional grocery set, something they call rest of market. And what we're starting to see now is the beginnings of a meaningful break, and we're nowhere near where we want to be, but there's separation. That separation has been been there now for a few months, and we're pleased with that, and we're focused on it. And at some point, we want those lines to cross and we want to get into the positive territory, but at this stage, there's a meaningful break. And I'm encouraged by that.

We refer to it as green shoots in the business.

I think the only thing I'd add, John, and agree with everything Greg said, in terms of the unit performance that we're seeing, if you look at the unit market share performance, actually it was pretty good. It was about the best we've seen in 2 to 3 years. So I think that's encouraging in the context of the market. But to Greg's point, our objective needs to be to get the units of the business to positive. And that is what we're focused on.

Your next question comes from the line of Simeon Gutman from Morgan Stanley.

When Kroger went out and did some big pricing investments, it was in the earlier part of the 2000s, a long time ago, and it took a couple of years for the sales needle to move pretty meaningfully. Can you give us a sense of the time frame? Because it sounds like you're going to do this more surgically and have it funded. So think about what's the appropriate time frame that we should expect a decent pickup in sales volumes? And if you're willing to frame, is the pricing opportunity or the value opportunity in the hundreds of millions or billions, just so we can understand how much needs to be funded over time?

Yes, Simon, good to chat again. Yes, I wasn't in the market when Kroger did it back in the 2000s, but have certainly spoken to some of the team here at Kroger that were. So I have a sense of that. And obviously, from my time at another retailer, I've got a sense of how it plays out as well. Look, we'll provide a bit more color on what we're seeing and what we're learning in October 20. At this stage, too early to comment. I don't really want to get into details around that and what's more, we're learning as we go. I appreciate this is not the same as at other retailer that I was at. So I have to understand some of the nuances that we will see around that. E-commerce has obviously changed from what it was back in 2014, 2015. So if you can just be patient with us, we'll give you some more color around October 20.

One thing to add, Simeon, I think as you guys, and obviously, as Greg said, we'll provide more color in the fall. The thing that you guys should be thinking about is we've said it. We've got a very significant cost opportunity in the business to take cost out, and it's more than enough to be able to afford the price investments we need to make.

Your next question comes from the line of Tom Palmer from JPMorgan.

Maybe -- and I appreciate there's more to come here in October, but I did want to maybe follow up on the price investments and at least understand how far along we might be at this point? I know it was cited as an item that contributed to the gross margin decline that we saw in the first quarter. Sounds like that's planned for throughout the year. So maybe just an update on kind of where we stand at this point in terms of price investments, and how you're thinking about it in terms of, I think, maybe more of a regional -- region-by-region focus versus plans to go much broader than that?

Yes. Thanks for the question, Tom. Look, we're being very thoughtful about how we do this. And just to build on David's point, we're funding it. So as we dig into what we're doing with cost of goods, when we dig into goods not for resale, as we start to expand our importing capability, we build up deposits in our bank account. And as those deposits build then we look at how we spend it. The comment around some price investment in the first quarter is, once again, we've been very thoughtful as we go through our negotiations with suppliers, as we deal with some suppliers who want to get price up, how much of that we will pass on. And I would say I'm very, very pleased with the way that the team under Mary Allen, Mike and Carlo have been managing that, managing where we want to sit with price, what we take, what we don't. And the rest of it I'll just reiterate, just be patient, we'll get to the fall, and we'll have more to share with you at that point.

Your next question comes from the line of Krisztina Katai from Deutsche Bank.

Greg, in your opening remarks and even now in some of the some of the answers to questions, obviously talked about operating costs growing faster than sales, and that's not being acceptable. Maybe can you talk about some of the areas of opportunity for the business that you see perhaps sizing up the various buckets for us? I know that there's going to be more to come on October 20. But how are you viewing the cost opportunities, especially in light of the operational and cultural improvements that you're seeking to achieve, especially at the store level?

Yes. Thanks for your question, Krisztina. There's really no shortage of opportunities as I've sort of got around the business over the last sort of 14, 15 weeks. Some of those are above the gross margin line, and they can be sitting in things like shrinkage rates sort of sitting in stores. They can be sitting in things like replenishment and how that's operating. And then some of them are sort of below the gross margin line and your traditional operational and general expenses, and it could be whether we've got the right number of people sitting in the right locations, what we're doing in terms of productivity in various parts of the business. So there is a reasonably long list of things that are going to add up over time, which will fund what we want to do.

So it's pretty wide and varied. There are literally opportunities at every single part of the business.

A couple of things to add. I mean the work is underway. So you shouldn't think about this as this is work that hasn't started. If I use our work on cost of goods sold, as an example, in Q1, we're already ahead of the expectations that we had for ourselves. So about 30% ahead of where we're at. And through the balance of this year, we expect the savings that we'll get out of the initiatives that are broad-based, as Greg said, we expect them to ramp over the course of this year, and they will endure over a multiyear period. So we think this number is significant, and that's why we feel confident we can use that as a source of improving affordability for customers.

Your next question comes from the line of Michael Lasser from UBS.

Greg, now that you've had a couple of months in the seat, it seems like your message is that Kroger can be the best version of itself without making any radical changes and [indiscernible] long-term formula of 3% to 5% earnings growth over time. Someone on the other side might say, "Hey, that might be difficult to do in an environment where your competitors are using profit pools outside of grocery to invest in driving the traffic that this sector brings." And Kroger is -- has to deal with the rigidity of its labor model at the same time that all of the growth is being driven by the grocery sector -- excuse me, by the online grocery sector. How would you respond to that? And as part of that, I don't know if you or David could note, what's going to change in the second half of the year as you're pointing to an inflection in your profitability given the updated comments that you provided around the second quarter.

Thanks, Michael. Michael, I remain incredibly encouraged by what I see as I get around the business. We've got the right format, generally in the right locations with the right size, selling the right product. People need to buy food. We've seen how important stores are in terms of e-commerce. Is e-commerce going to grow? For sure. So well run Kroger has the right assets to be able to compete with anyone out there. And because of our scale, we can also compete in retail media. And David commented in his script about the performance of that, and I'll just layer in. It's actually going really well for us. I sat down yesterday with Christine, who looks after that business, and I finished that session with her even more encouraged by the results that she's getting of late, which just continue to accelerate. So we've got the scale and we've got the assets to be able to compete. And we've got the format. There is no doubt that clubs are a powerful format and perform extremely well. But not everyone wants to go into a store that size and have to deal with pack sizes that big.

I obviously understand the supercenter business, and we even have some ourselves. A lot of people prefer to get into a 50,000, 60,000 square foot store and do their shopping and get out again. And by the way, if you're picking groceries and you're picking them in a store that size, they can also be quite efficient. So I like the fact we're in supermarkets, good article about [indiscernible] in the Financial Times today, but not everyone wants to go into store with 2,000 to 3,000 own brand SKUs. They want to be able to buy national brands. We're well positioned. We've got the assets. We've got enough scale. We can compete, whether it's in digitization and media and all those things that anyone else can. And we've got opportunity to grow. There are parts of this country where we're not operating at the moment. So I feel good about that. David, do you want to pick up the second part?

Yes, I'll take the question about H2, Michael. So I think -- listen, I just want to reiterate, I mean, we were, I think, pretty pleased with Q1, and I think particularly the share performance. So I think Q1 sort of broadly came in where we expected. Obviously, it's Q1, so it's still early in the year. So there's lots of unknowns as we head through the balance of the year. But I think a few things that, for us, give us confidence in H2, or the balance of the year and the outlook that we've got. I think the first thing is the cost initiatives ramp up. So that's going to give us fuel. What does that allow us to do? It allows us to continue sharpening value. It allows us to, as Greg talked about, focus on execution, focus on traffic. And that is building the unit momentum, continuing to accelerate our share performance.

I think the third thing is the e-comm business turned profitable in the quarter. And as that business continues to grow and accelerate, that will generate more profit performance for us, which is a really good piece of good news for us. And then the final thing is, again -- and we'll still be within the range that we communicated in inflation, and we're going to keep working very diligently with suppliers, but I think as we get through the balance of the year, we will also continue to see some increased pressure on inflation as we head through the balance of the year.

So I think we feel pretty good about how we called it. And obviously, we'll keep you guys updated as we move through the year.

Your next question comes from the line of Leah Jordan from Goldman Sachs.

I just wanted to build off of that last question. I hear on the cost savings driving a lot of the profit improvement for the year, but your updated outlook for 2Q is really suggesting the ID sales sky will be more back half weighted than maybe we thought last quarter. So just more detail around how you're thinking about inflation volumes in traffic as we move through the year? And ultimately, what I'm trying to get at is how much of that top line acceleration being driven by the macro versus your own initiatives underway like the improvements on affordability?

Yes. Leah, thanks for the question. I think a few things as we think about sort of Q2 and the year. I think as we reflect back on the plan that we built, I mean the plan was always going to be more H2 weighted. So I think that was the plan that we build for ourselves. And as you know, we don't guide to specific quarters. And what I'd say is things are playing out broadly as we expected with the exception of the fuel inflation that Greg touched on in his script.

I think as we head into Q2, I think a few things to think about. So the first is, we are expecting FIFO gross margins to be better. So we've got a number of things that egg inflation -- or egg deflation a very meaningful one, that will improve as we get into Q2. We are expecting our OG&A investments to be a little bit higher as we go through the year. Those are deliberate investments in the same things we've been talking about, back to Greg talking about well-run stores, you need engaged associates, well trained, right number of them in the store, right number of hours. So we're making deliberate choices about that.

I think the other thing about Q2 is whilst none of them are individually material enough to call out, collectively, we are lapping a collection of sort of what I would call onetime items that caused some headwinds for Q2 specifically. And that's why you get the difference between what will ultimately be our H1 numbers and H2.

And to build on the point, as I said to Michael's question, listen, the cost savings ramp up, gives us more fuel to invest into the business, a little bit of inflationary pressure or still within the range as we move through the balance of the year, and an e-com business and a media business that will continue to accelerate.

Your next question comes from the line of Edward Kelly from Wells Fargo.

Greg, I wanted to ask you, you've mentioned the desire to move fast. I think last quarter, you said something about behind competition, but you want to catch up and then pass. And the strategy as it pertains to investing in price and funding it with cost saves, we have heard others talk about that as well. I think almost every company we cover this quarter has talked about investing in price. My question is, how are you weighing the speed at which you want to move? So meaning slowly stepping on the accelerator and hoping the competition doesn't see you coming versus flooring it and really closing the gap and the success of each of those sort of initiatives? I'm just kind of curious as to how you weigh the pace at which you're moving. And then maybe you could weave in, I know you're doing some price tests currently, what you're seeing in those price test, and how that might inform how this process sort of moves forward?

Yes. Thanks, Edward. As I said in the script, it's really about threading the needle, isn't it? You have to be pretty thoughtful here that what you're doing is you're balancing the short term with the longer term. And the other component that comes into play is the capability of the team to be able to execute. If you're going to start moving on price, you need to make sure that your stores are in good shape. So there are other things that have to come into play at the same time that you start to think about, "Well, gee, maybe I need to get a little bit more affordable on price."

If I can just tease out the price comment piece, the objective of Kroger, and if you go back to the 2000s, and I think it might have been Simeon or one of the others who raised it last time this was done in a meaningful way, I think. The objective actually is not to get down and be the same price as if you like, some of the discounters in the marketplace. The objective here is to get to a situation where customers feel comfortable that the price that they're getting when they shop in a Kroger store or a Kroger brand is actually fair and reasonable. And if you have a look at sort of what's been happening in the rest of market, what's happened is those price gaps have widened over several years. And that's, I'm sure, one of the reasons why the share starts to move from rest of market to the other end of the market that's called [indiscernible].

So our objective here is not to go and price ourselves at a discount price, it's to actually get to a situation where the customer says, "You know what, I have a choice of turning right or left when I leave my house, or I can swipe left or swipe right on my phone." And we want them to go, we're going to swipe to Kroger or we're going to drive to Kroger because it's a terrific grocery store. It's got a great range of fresh food. It's got a great range of brands, national brands and our brands. It's affordable. Or if I'm going to go online, it's got everything that I want in my basket. If I need to get it in 30 minutes, I can do that. If I need to get it same day, I can do that, and it's got some uniqueness about it in terms that they do fresh really well, they do convenience meals really well, and they've got a terrific selection of Own Brands.

So that's the position that we want to take. And we do that very carefully, surgically almost by threading this needle. I am very, very conscious as is David that what we're doing here is going to be hard. We're not taking any dramatic drastic actions. We're being very surgical, very thoughtful I guess I've had the benefit of doing this before. Let's wait and see what happens from a competitive perspective. I can't judge that at this point. we'll know more, and we'll share more when we get to October '20. But it's sort of how I'm thinking about it. Anything you want to add to that, David?

No. Maybe I don't know whether the price test were running this. And as you'd expect, we're running price tests.

And we're not going to divulge the details of that at this point in time for obvious reasons. But we'll share a bit more when we get to October '20.

Your next question comes from the line of Seth Sigman from Barclays.

As you think about the guidance for this year, it sounds like the investments are going to ramp, but the savings are also going to ramp. And previously, you had targeted that $400 million of savings from e-commerce. Is there a bigger, maybe more inclusive number for savings that's built into this guidance now that you can quantify to give investors some confidence in your ability to drive all of that change?

Yes. Seth, let me take that one. I mean we obviously communicated last year when we closed the Ocado sheds included in our guidance, the $400 million improvement in e-commerce. And what I'd say is that e-commerce profitability, which includes, obviously, that $400 million improvement is ahead of schedule and accelerating faster than we thought. So I think that is an additional tailwind. We -- whilst I'm not going to put a number on it, we will share more in the fall about what we think the multiyear opportunity is. The cost savings that we plan to realize through the balance of the year are more than sufficient for us to make the investments that we talked about. So I talked about OG&A likely to be an area of continued investment as we head through the year, offset with improvements in gross margin.

So in summary to your question, the savings are bigger than the investments, and that's what gives us confidence in our ability to deliver the profit number for the year.

Your next question comes from the line of Rupesh Parikh.

So on the pharmacy business, I was curious how you're thinking about the headwind related to the Inflation Reduction Act and branded generic for the balance of the year? And I also want to see if you can provide any color on quarter-to-date trends?

Yes, let me take that one initially, Rupesh, and then I'll ask Greg to add any additional color. Lots of changes in the pharmacy space this year. We obviously knew about the Inflation Reduction Act coming into the year. We estimated that to be about a 130-basis-point headwind for the year. And honestly, it's playing out exactly as we expected. Obviously, that's a headwind to sales. But given the way the rebates work, it's neutral from a profit perspective.

What we're also seeing, and it's an industry thing, is a sort of shift from branded drugs to generics, impacted us by about 40 basis points on the total quarter on total ID sales. On that one, even though it's a headwind to sales, it's actually profit positive. So it helps improve the margin profile of the business, and again, hence, why the sales headwind doesn't impact our profit guidance.

I think despite these pressures, honestly, the pharmacy business continues to do well. If you look at core scripts, GLP-1 performance, we're winning share. And that's really the sort of yardstick that we use to measure the performance of the business as well as the financial ones. And I think as you think about something like GLP-1s, that consumer who comes and fills their prescription in the store, not only are they filling their prescription, but they're also changing their eating habits. They want more fresh, higher protein, they're shopping better [indiscernible] categories. So I think we feel that the overall Kroger ecosystem is very well positioned to serve those customers. So I think, yes, some headwinds on the top line for the pharmacy business, the industry facing much of the same. We're winning share. I feel good about how we're doing.

I think that's exactly right, David. I think a little bit like we're seeing in the rest of the business, there's some good underlying sort of foundational trends here that are coming through. As you said, we've picked up share, script count is up, we're just rolling out delivery. So like we're seeing in grocery, units are better, dollar share is getting better. So we feel good about pharmacy.

Your next question comes from the line of Scott Marks from Jefferies.

In the prepared remarks, you made some comments about the consumer under pressure between higher gas prices, some of the changes to the SNAP programs. Wondering if you can just give us a little bit more detail around what you're seeing from the consumer, specifically across different income cohorts? And what you're seeing just in terms of purchasing behaviors and habits?

Yes. Thanks, Scott. I would say that averages can always be a little bit misleading. So you need to get into the detail. SNAP, I would say, is most impacted across 3 states, in particular, and we see a bit of that flow through. In terms of the price of fuel having an impact, when that price gets up to what it has, I think we see that some of the basket sizes, some of the items that people buy tend to be traded down a bit. I think that helps probably with Our Brands and how we're operating.

So SNAP has varied across the country. Petrol is more wide spread right across the country. We would say that based on the share data that we're seeing and the positive results that we're getting out of that, we're doing okay. We're managing through this, and I'll go back to the comment I made previously. I think we're threading the needle nicely between delivering the right level of profit and the right level of price.

Your last question comes from the line of Paul Lejuez from Citi.

[indiscernible] on for Paul. You all mentioned that freight costs were higher than you initially expected. I was just wondering if you could share the magnitude of that impact in 1Q and the impact that had on e-com profitability? And then what have you contemplated for freight costs for the rest of the year? And if you could share maybe offsets that you're working through there?

Yes. So let me take that one, Paul. So as we've said in the script, that it cost us about 15 basis points on the gross margin line. So without that, the gross margin line would have been slightly positive.

On e-com profit, whilst they cost us a bit, we're making really good progress on e-com profit. We turned profitable in the quarter. And it wasn't just as a result of the closing of unprofitable Ocado sheds. We made progress really across the board. Great -- I think it was the record level or lowest level cost to serve that we've seen. Wait times were best ever. I think we've got many more opportunities to improve that through the balance of the year. Fuel prices are very hard to predict through the balance of the year. I'd love to be able to do that perfectly. Obviously, we can't. So we think we've made a sensible assumption in the guidance through the balance of the year. We think it's a manageable headwind. We think we've got enough in the tank to be able to deal with it.

Obviously, we hope, like everybody else does, that the news coming out of the negotiations between the U.S. and Iran alleviate some of those pressures. But we're prepared to deal with it regardless of what the outcome is.

We have reached the end of the Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.

Good morning, and welcome to The Kroger Co. Fourth Quarter Earnings Conference Call. My name is Alex. I'll be coordinating today's call. [Operator Instructions] Please note that this event is being recorded. I'd now like to turn the conference over to Rob Quast, Vice President, Investor Relations. Please go ahead.

Good morning. Thank you for joining us for Kroger's Fourth Quarter and Full Year 2025 Earnings Call. I am joined today by Kroger's newly appointed Chief Executive Officer, Greg Foran; Chairman, Ron Sargent; and Chief Financial Officer, David Kennerley.

Before we begin, I want to remind you that today's discussions will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger Company assumes no obligation to update that information.

After our prepared remarks, we look forward to taking your questions. [Operator Instructions]. I will now turn the call over to Ron.

Well, thank you, Rob, and good morning, everyone. Thank you for joining our call today. Before we start, I'd like to just take a moment to welcome Greg Foran as Kroger's Chief Executive Officer. Greg is a strong leader with a proven track record of driving growth in large and complex businesses. He has spent most of his career in food retail, and he understands what it takes to run great stores and build a strong e-commerce business. His priorities align closely with the work we've been doing over the past 12 months, putting the customers at the center, moving with urgency, strengthening our e-commerce business, accelerating media and improving productivity to invest in lower prices.

Many of you will know his background. He started as a store associate at Woolworths in New Zealand and eventually led Walmart U.S. where he was responsible for thousands of stores as well as over a million associates. During his tenure, the business delivered consistent sales growth while improving store operations and building e-commerce capabilities. Most recently, Greg led Air New Zealand during the pandemic, one of the most challenging periods in the history of the airline industry, helping position the company for a solid recovery and leading their digital transformation.

Greg is the right person to lead Kroger, and we're excited to have him. He will close our prepared remarks today with his early impressions and focus areas, as he steps into the new role.

Now turning to the fourth quarter. We're pleased to report another quarter of strong results, capping off a strong year for Kroger. Importantly, in the final period of the year, we achieved positive market share growth for the first time this year. For the full year, we nearly doubled our identical sales without fuel from 1.5% to 2.9% and grew earnings per share by 9%, which was at the high end of our earnings expectations.

This performance speaks for itself. We're executing on our priorities and delivering results. This year, we've been intentional about focusing on what matters most to our customers, and this work has laid the foundation for long-term growth. Today, I'll talk about the things we got done and the proof points of our progress.

In the fourth quarter, we continue to make meaningful progress on our core priorities; improving the customer experience, simplifying our business and ensuring we have the right talent in place to move with speed. These actions are strengthening our competitive position today and are building a more efficient customer-focused company for the future. Serving our customers better starts with delivering value and making the customer experience easier.

This quarter, we again made price investments to lower everyday prices and to offer more promotions, and this improved our value perception with our customers. We also added store hours during the holidays, particularly in high traffic departments, so more associates were available when customers needed them most. These changes improve checkout times and contributed to positive trends in customer satisfaction. As part of simplifying the business, we announced the sale of Vitacost and plan to close nearly 50 underperforming little clinic locations.

We also continue to review all noncore assets to determine their ongoing contribution and role within the company. These decisions reflect our commitment to running a more efficient company and focusing on priorities that add the most value. A strong leadership team is also essential to moving faster and executing our strategy. This quarter, we promoted Victor Smith to Senior Vice President of Retail divisions, along with new division presidents in Atlanta, Fry's and Ralphs, each with deep operational experience and a track record of running great stores.

These leaders were developed within our organization, which speaks to the depth of talent we have across the company. This week, we also elevated Milen Mahadevan for a newly created role to lead artificial intelligence work across the company, reinforcing the priority that we're placing on AI. Milen most recently served as President of 84.51°. We see AI as a meaningful opportunity to both improve the customer experience and drive productivity across our business. We're already seeing results from more competitive pricing, improved shrink to faster fulfillment and tools that help our associates work more efficiently.

As we move forward, we plan to expand these capabilities, including Agentic shopping on our digital properties. Milen's appointment ensures we have dedicated leadership to accelerate this work. As we look back over the full year, we took several important steps to position Kroger for future growth. We lowered prices on thousands of products making it easier for customers to see the value we offer. Customer price perception improved across the company, and we maintained our competitive positioning against our major competitors.

We created a dedicated e-commerce team and completed a comprehensive strategic review of our e-commerce operations, that led to an updated hybrid fulfillment model, which will better meet customer expectations. These changes will make our e-commerce business profitable in 2026. We delivered substantial cost savings across the organization through operational efficiencies and modernizing how we work. We then reinvested those savings directly into lower prices and improved customer service.

We made difficult, but necessary, decisions to close underperforming stores and reduce corporate headcount to create a more agile and focused organization. We accelerated our new store investments in 2025, completing 29 major projects. And in 2026, we expect to increase new store openings by 30% with plans to expand into 2 new regions including Jacksonville and Kansas City, 2 high potential markets that will support our long-term growth.

Collectively, these actions simplify how we operate and sharpen our focus on the core business. They also position us to reinvest in the areas that matter most to our customers, more value and best service. We've made strong progress, and there's more to do, which Greg will touch on later.

This is how we're building a stronger foundation for sustainable growth in the years ahead. Before walking through the quarter, I want to briefly comment on the customer environment. Customers remain focused on value in the fourth quarter, which was consistent with the trends that we've seen throughout the year, and we are continuing to invest in price to make sure we're delivering the value customers expect.

Now turning to our results. Identical sales without fuel grew 2.4% this quarter, which includes nearly a 40 basis point headwind from the Inflation Reduction Act. Weather had a neutral impact on a year-over-year basis. For the full year, identical sales without fuel grew 2.9%, in line with our full year guidance. We saw continued strength in e-commerce and pharmacy, along with solid performance in key areas of the store like Fresh.

Importantly, food volumes improved and grocery sales were a larger portion of our sales mix, which is a positive sign going forward. Our market share trends improved in the fourth quarter, and for the full year, and I'm pleased to report that on our final period, we delivered positive share gains, our strongest share performance since 2021. We believe the price investments we've made throughout the year are resonating with customers and are contributing to these results. And we made these investments while still improving our full year gross margin rate, excluding fuel and adjustment items by improving shrink and productivity.

We're committed to this balance, investing in lower prices while being disciplined in our margin management and the work we're doing to find efficiencies across our business allows us to do both. David will speak to these factors in more detail.

Our brands had a solid quarter. Excluding the impact of egg deflation, sales continued to outpace national brands. Simple Truth and Private Selection, again led our growth with customers continuing to choose these products because they deliver high quality at an affordable price.

Innovation continues to be a priority. This year, we introduced more than 1,100 new Our Brands products, up from more than 900 last year. A growing number of these products are focused on health, an area where customer demand is growing and Our Brands portfolio is well positioned to lead. Our e-commerce business continued to be an important growth driver and one of the key ways we attract new households. Adjusted e-commerce sales grew 20% this quarter and we've now built this into a $16 billion business.

We also continue to make meaningful improvements in e-comm profitability. As this business grows, the profitability improvements we're seeing become increasingly significant to our P&L. E-commerce growth also fuels our media business. More customers shopping online means more impressions, more data and more value for our advertising brands. That connection between e-commerce and media is key to how we accelerate profitability, and we see significant runway ahead.

The early results from our new relationship with DoorDash and Uber Eats have exceeded what we originally planned. They have extended our reach to customers and shopping occasions we wouldn't otherwise capture. They're incremental, and they are profitable. Together with Instacart, we expect our convenience offerings to deliver over $1.5 billion in sales in 2026, which will help us accelerate our e-commerce growth.

Before I turn it over to David, I'd like to take a moment to reflect on the progress we made this year. We took important steps to strengthen Kroger for the long term; lowering prices and improving store execution to better serve our customers; enhancing our e-commerce business to deliver growth, while improving profitability; accelerating our store footprint; taking meaningful action on our noncore assets; and strengthening our leadership team with key appointments. These actions reflect our focus on serving customers better, running great stores and simplifying the company so we can move faster.

And to our associates listening in, thank you. I'm proud of what this team has accomplished. The work you delivered has built a stronger, more focused company, and I'm confident in where we're heading. It has been a privilege and I'm honored to continue serving on the Board as we enter this next chapter.

And with that, I'll turn it over to David.

Thank you, Ron, and good morning, everyone.

Kroger delivered another strong set of results this quarter in an environment that remains dynamic. We executed well, delivering solid e-commerce growth, maintaining cost discipline and achieving our profitability goals. From a financial perspective, this was a year of both strong performance and deliberate investment in the future. We invested in price while improving our FIFO gross margin rate, excluding fuel and adjustment items.

We accelerated e-commerce profitability, and we improved our cost structure to redeploy those savings into areas that drive growth. These actions strengthen our financial foundation and support sustainable performance going forward. The momentum in our business gives us confidence in our outlook for next year.

Today, I'll start by covering our Q4 results in more detail and highlight some key full year metrics and then share our guidance for 2026 and the key drivers behind it.

We achieved identical sales without fuel growth of 2.4%, a strong result that includes a nearly 40 basis point headwind from the Inflation Reduction Act. On a 2-year stack basis, identical sales without fuel grew by 4.8%. Growth was primarily driven by improving trends in units. As Ron mentioned earlier, our share trends improved in 2025 with fourth quarter trends again improving and culminating in positive share gains in our final period of the year.

Sales growth was led by e-commerce and pharmacy, along with strong performance from Fresh. As Ron mentioned, what's encouraging is the underlying composition of that growth. We saw continued improvement in food volumes with grocery sales representing a larger portion of our overall sales mix. Pharmacy had another strong quarter led by growth in both core scripts and GLP-1s. That said, Pharmacy contributed nearly 50 basis points less than in the third quarter reflecting the impact of the Inflation Reduction Act and an accelerating shift from brand to generic beginning in January.

Food inflation moderated further in the quarter, down approximately 90 basis points compared to Q3, with egg deflation a significant headwind, partially offset by beef inflation. Our FIFO gross margin rate, excluding rent, depreciation and amortization and fuel was flat in the fourth quarter compared to the same period last year. This result was primarily attributable to sourcing improvements, lower supply chain costs and lower shrink offset by price investments and the mix effect from growth in pharmacy sales, which has lower margins.

When we provided our second half outlook, we updated our FIFO gross margin rate expectations, excluding fuel and KSP, to be relatively flat for the full year. We delivered better than that, and as our rate improved in the second half of the year, primarily driven by our performance in the fourth quarter with favorable mix and better shrink results.

For the full year, excluding the effect of KSP, fuel and adjustment items, we improved our rate by 14 basis points, while investing more in price, reflecting the balance we are focused on achieving between delivering value and maintaining margin discipline. The operating, general and administrative rate, excluding fuel and adjustment items, increased 21 basis points in the fourth quarter compared to the same period last year. The increase in rate was primarily attributable to cycling real estate gains from a year ago and labor investments to improve customer experience, partially offset by lower incentive plan costs and improved productivity.

We continue to make progress on improving our cost structure and importantly, we're generating more durable cost savings, which we are reinvesting into stores and the customer experience to deliver better service and more value to customers. With that said, we believe we are still in the early stages of what we can achieve. Sourcing and procurement remains a significant opportunity together with modernizing our ways of working, we see substantial runway for cost savings ahead.

Our LIFO charge for the quarter was $11 million compared to a LIFO charge of $30 million last year. On a full year basis, our LIFO charge was $157 million in 2025 compared to $95 million last year, resulting in a $0.07 headwind to EPS. We expect our LIFO charge in 2026 to be similar to 2025. Our adjusted FIFO operating profit in the quarter was $1.2 billion. Q4 adjusted EPS was $1.28, reflecting 12% growth compared to last year. For the full year, adjusted EPS was $4.85 and grew by 9%, coming in at the top end of our long-term growth expectations.

Fuel results were better than expected this quarter, driven by strong fuel margin performance even as gallon volumes declined. Q4 fuel profitability came in ahead of last year. Fuel continues to be an important part of our strategy, building loyalty through our fuel rewards program and providing another source of value for our customers.

I'd now like to turn to capital allocation and financial strategy. We delivered strong adjusted free cash flow of $3.9 billion this quarter (sic) [ for full year ] , exceeding our expectations. This was driven by the strength of our operating performance, good progress on a range of working capital initiatives and favorable year-end timing. Our balance sheet remains healthy with our net debt to adjusted EBITDA ratio still below our long-term target range. This gives us the financial flexibility to pursue growth investments and other opportunities to enhance shareholder value. Over time, we expect to move back towards our target leverage ratio.

During the year, we completed our $7.5 billion share repurchase authorization. This included a $5 billion accelerated share repurchase program, followed by open market repurchases, which completed our remaining authorization in Q4. In December, our Board approved an additional $2 billion share repurchase authorization, and we expect to complete these repurchases by the end of fiscal 2026.

Our capital allocation framework remains consistent. We are focused on investing in opportunities where we can generate the highest long-term returns and improving ROIC remains a core priority. We are encouraged by the progress we're making on our major store projects and our recent remodels are delivering higher-than-expected returns. These investments will be important to driving ROIC improvement over time.

I'd now like to share our guidance for 2026 and walk through the key factors shaping our outlook. We expect identical sales without fuel growth in a range of 1% to 2%. It is important to note that the Inflation Reduction Act will create an approximately 130 basis point headwind to identical sales without fuel this year, reflecting the impact of lower reimbursement rates on key medications while having no impact on gross profit dollars.

Excluding the IRA impact, we would expect identical sales without fuel growth in a range of 2.3% to 3.3%. In terms of quarterly cadence, we expect Q1 identical sales without fuel to come in near the low end of our full year range, driven primarily by continued egg deflation. As this headwind eases, we expect sales trends to improve. A few other dynamics to keep in mind as we think about the year. We expect overall inflation to be lower than it was in 2025. Within Pharmacy, we expect sales growth to moderate to low to mid-single digits, reflecting the impact of the Inflation Reduction Act on reimbursement rates and the ongoing shift in brand to generic mix, which is currently greater than we've seen in the past, partially offset by continued GLP-1 adoption and script growth.

We'll also continue to regain ESI households, though progress remains gradual, and we do not expect to fully recover the business we previously lost. We expect e-commerce to accelerate from 2025 growth rates with continued strength in delivery and increased store-based fulfillment through our third-party delivery providers. We're also enhancing our loyalty program in 2026. This includes updates to our rewards program and a revamped Kroger credit card, both designed to deepen customer engagement and drive increased shopping frequency across our in-store and e-commerce channels.

Total sales without fuel should be slightly lower than identical sales without fuel, reflecting an approximately $350 million headwind from the closure of our Florida fulfillment center and $300 million headwind from the sale of Vitacost partially offset by new store openings. We expect adjusted FIFO operating profit in a range of $5 billion to $5.2 billion.

We will continue to drive greater value for our customers by investing in price, both in everyday value and through promotions, and we expect these investments to increase compared to 2025. We are also investing in the customer experience, particularly in service and labor hours, ensuring our stores are well staffed. Even with these increased investments, we expect our FIFO gross margin rate, excluding fuel and adjustment items, to improve in 2026. These investments will be funded through increased productivity and cost savings. We expect to exceed our 2025 cost savings with increased contributions from 2 areas, in particular, e-commerce and procurement.

In e-commerce, we will lower our cost to serve by fulfilling more orders out of stores, closer to our customers and by leveraging our third-party delivery providers. In procurement, we are going after both cost of goods sold and goods not for resale with a level of intensity that reflects the scale of the opportunity. In Fresh imports, national brands and Our Brands, we are renegotiating supplier agreements, going direct where we have historically used intermediaries and ensuring that every dollar of Kroger's purchasing power is working for us and our customers.

The savings we generate flow directly into lower prices for our customers. We have dedicated teams focused on these areas, and we are confident in our ability to deliver. Our Media business delivered solid results in 2025, and we expect to build on that momentum. Our merchandising and Media teams are working more collaboratively, which is improving the quality of our activations and outcomes for brands. In 2025, our alternative profit businesses, which include Media, Kroger Personal Finance and Insights, delivered $1.5 billion in operating profit, and we expect Media to deliver double-digit growth in 2026.

To support our modernization efforts, we are launching the Kroger Global Capability Center. This initiative is designed to streamline decision-making, improve productivity and increase the speed at which we execute on behalf of our customers. It complements the work already underway across the organization to modernize how we operate. Work has started and is progressing with speed. We expect modest benefits in 2026 with more significant benefits expected in 2027 and 2028.

Turning to capital allocation. We will continue taking a disciplined approach focused on long-term shareholder value. We expect capital expenditures of $3.8 billion to $4 billion with increased investments in new store growth. These new locations are strategic investments in our future. They follow a natural maturation curve. It takes time to build customer awareness, establish traffic patterns and reach profitability. In early months, we absorbed start-up costs and elevated labor expenses as we staff up and invest in training. This is expected, and it reflects the same disciplined approach we have executed successfully for many years.

These stores will drive volume growth, expand our customer base and strengthen our presence in key markets. We are confident they will deliver meaningful long-term returns. As part of our new store strategy, we're also testing different formats and bringing fresh thinking to the in-store experience. That means evaluating new concepts, making sure every element of the store is relevant, productive and aligned with how customers want to shop today. Beyond new stores, our capital investments will support technology and AI, where we are investing aggressively.

These investments serve 2 purposes: improving the customer experience and driving productivity throughout the company. This year, we're introducing Agentic AI shopping for our customers, which will help them discover items, build baskets, plan meals and stay within budgets, all in a personalized way. We're also investing in supply chain modernization with more automation and expanded capacity. And we'll also continue investing in our remodels to ensure our stores deliver a consistently strong experience. We expect adjusted free cash flow of $2.7 billion to $2.9 billion and adjusted net earnings per diluted share of $5.10 to $5.30. I will now turn the call over to Greg.

Thank you, David, and good morning, everyone. I'm excited to be here and grateful for the opportunity to lead this great company. It's been about a month since I started, and I've spent that time learning Kroger from the inside out. I've been spending time with Ron and the leadership team, having one-on-one conversations with leaders across the organization and getting out to visit stores, distribution centers and manufacturing facilities. And importantly, also watching how our customers shop.

I've begun working with the team to review our strategic plan, and I'll share more as that work progresses. What I've seen so far has reinforced my belief that Kroger has tremendous strengths to build on. We have a loyal customer base, dedicated associates, a strong store network and real momentum in areas like Fresh, e-commerce and Our Brands. I've also been impressed by the energy I've seen in the stores, associates taking ownership of their work and taking pride in serving customers. The team has done excellent work, particularly over the past year to strengthen the business. And my focus is on how we operationalize our strategy to make us even better.

It starts with the top line. We need to grow sales faster. And in my experience, that comes down to giving customers a compelling reason to shop with you by offering great value, great products and a great experience. Price is an important part of that equation. Customers need to trust that they're getting a fair deal every time they walk into our stores. We've made progress on price, and I want to keep pushing by pulling unproductive costs out of the business, investing in everyday value, sharpening our promotions and making sure customers see and feel the difference when they shop with us. When you combine competitive prices with strong Fresh and a well-run store, you drive traffic, you grow baskets and you gain share. That's what I want to accelerate at Kroger.

I've spent my career in food retail and running great stores is how you make that happen. It's about delivering a great experience consistently in every store on every visit, with a shopping in store or online. Fresh is a good example. Customers develop a lasting impression based on the quality of fresh foods, which is incredibly important as we accelerate e-commerce, get those right and we earn their confidence. My focus will be on continuing to improve execution and ensuring our associates have the tools and support they need to serve customers well.

To invest more aggressively in the customer experience, we have to be disciplined and aggressive on costs. I see significant opportunity here, and we're going after every available margin dollar across the business. Some of that is buying better, improving how we source and procure products. And some of it is improving productivity by streamlining processes and modernizing our ways of working. The savings we generate will be reinvested directly into lower prices and better service for our customers. That's how we will fund our growth.

Customers want convenience and are increasingly shopping online to buy food. We have the assets to meet that demand and e-commerce is a key focus area for us. We've built this into a more than $16 billion business with 7 consecutive quarters of double-digit growth. There's a strong foundation, but we need to accelerate it. Our stores are central to how we serve customers online.

Our refreshed hybrid fulfillment model, which better leverages the stores and delivery providers like Instacart, DoorDash and Uber Eats, positions us to accelerate growth while reaching profitability next year.

By using our stores as fulfillment hubs, we get inventory closer to customers, reduce last mile costs and offer the speed and convenience that customers are looking for. Our Media business is closely tied to this e-commerce momentum. We have the data, we have the customer relationships, and we have the platform. As e-commerce grows and our digital capabilities expand, we see a long runway to accelerate growth. My goal is to do all of this while protecting our margins. The investments we're making in price and the customer experience are funded by the cost savings and efficiencies I described and by growth in Media. That discipline is essential. We will grow the top line and gain share, invest in the customer and deliver long-term value for shareholders.

I've been in food retail a long time, and I know what good looks like. It starts with the customer. It's built on strong execution in our stores and online. And it requires a team that wants to win and is willing to move fast. That's what gives me confidence. Kroger has all the ingredients to win, and my job is to bring it all together. We'll now open it up for questions.

[Operator Instructions]

Our first question for today comes from Krisztina Katai of Deutsche Bank.

Welcome, Greg, to the Kroger family. I wanted to focus on your initial assessment. You obviously emphasized the need to grow sales faster. You talked about offering great value. So beyond price investments, can you dig a bit into the initiatives or the strategic shifts you envision to significantly accelerate the top line growth? And we think about a potentially softening or more price-intensive environment, protecting the margin that you talked about. Just how much runway do you see for further improvements in sourcing and procurement?

Look, Krisztina, it certainly is pretty early for me. I'm just into my fourth week here. What I would say is that the foundation that Ron and the team have built is incredibly solid. So decisions that have been made, particularly in the last year set us up. Do we need to do more in price? For sure. But the work is underway on that. I need to spend more time to get into the math that is around that. But as David has pointed out in his remarks, we see opportunities. We see opportunities in cost of goods sold. We see opportunities in doing a better job with imports. We see opportunities in the Kroger capability center.

And then there'll be the normal ones around shrinkage and other areas in the business that we can lean into. So as I work through this over the next sort of 90 to 100 days, I'm working with the team closely. We'll pull this together. and see how the numbers come out and at an appropriate time before the end of the year, we'll share some real detail with you. Now on top of that, we know the inherent strengths we have in the business. We've got a great Fresh business. We need to make sure that it's consistent right across every store every day.

We know we've got a great Own Brands Business. We know that we can accelerate e-commerce and the decisions that have been made by Ron and the team put us in a great position. As you accelerate that, you can accelerate Kroger Precision Marketing. So look, 3.5 weeks in, I'm still doing lots of homework, but I'm feeling good about what we've got in front of us. So lots of runway.

That's great. And then if I could just have a follow-up. I mean you have a newly created AI role. Can you maybe for Kroger as a whole, just talk about maybe the talk through 2 to 3 specific quantifiable targets for AI's impact on the customer experience and productivity that you would expect to achieve in the next 12 to 24 months?

Krisztina, it's David. Let me take that one. Listen, we see AI as a big opportunity, and it's an area we're excited about. Obviously, Ron talked in his remarks about the appointment of Milen to lead this work. And I think that, that makes a big statement about how serious we're taking this. And we have significant investment dollars in 2026 and beyond targeted at making sure that we crystallize this opportunity.

What I'd say is, like many other companies, we're at the early stages. We've made some good progress, but we've got a lot more to do. And I think we've got already some emerging good proof points of the work that we're doing. I think if you look at areas like operations, some of the shrink results that you've been seeing from us are driven by technology and AI. And that's an area where I'd expect us to continue to invest.

In the people space, we've got some really good tools that are improving the employee experience, helping us manage labor better, help us schedule labor better. And I think, of course, there's then Agentic shopping. We've got our own digital shopping assistant live in a couple of divisions. That's on the Kroger platform, and we'll expand that later this year to all divisions. We've obviously announced the partnership with Google. And I think there's a lot more to come in the Agentic space, leveraging the advantages that we have on quality, freshness, et cetera. So I think a big area of focus for us, some good early proof points, the organizational and foundational investments we're making super critical and much more to come, both from a customer experience and what I'd call productivity experience.

Our next question comes from Michael Lasser of UBS.

Welcome back, Greg. My first question is, can you contextualize the absolute dollar level of investment that was made in the fourth quarter in order to stabilize the market share? How does that inform how you're going to invest over the next several quarters? And how do you balance this need to improve value perception without sparking a response from your discount-oriented competitors that results in a race to the bottom in terms of profitability.

Michael, it is David. Let me take that one.

So I think as we've been talking about, value perception, closing price gaps has been an important priority for us all year. And we've been deliberate about investing in promotions, giving consumers ways to stretch their budgets. And as we built our plans for 2026, it was a very, very deliberate area of focus for us, that we needed to do more. So whilst we're making progress on everyday price gaps and what we call the all-in price gap, it's an area where we know we need to be more competitive.

So as we think about next year, it is an area where we've put more dollars candidly than we have really over the last several years. But we've done that and they're going to be focused on this, doing this in a very deliberate way to balance the margins. As I talked about in the preprepared remarks and as Greg has already touched on as well, we see a very big opportunity for us to optimize the cost structure of the business. And I think about -- as we think about this going forward, we want to be able to take those unproductive costs, and we want to be able to, number one, invest those back into the -- both pricing and store experience whilst balancing the margins.

I think as you sort of talk about the response from competitors, I mean, candidly, we're focused on what we can control. We're certainly not interested in starting price wars, but we know that we want to make sure that when consumers walk through the door of a Kroger store or any one of our banners, they walk in and can get good affordable prices. So that's the way we're thinking about it.

And Michael, let me just add to that just briefly. As you can guess, we monitor our competitors all the time, and we certainly have a healthy respect for all of our competitors. But when you look at our share trends, we have improved share trends 5 quarters in a row, and we're happy they turned positive in January. And as I said before on this call, this is not a zero-sum game. At Kroger, we're playing to our strengths, whether it's Fresh categories or Our Brands or deep first-party data, our growing omnichannel business with e-commerce growing 20% last quarter. And these are not easy things to replicate in a hurry. And when you look at our focus, it's really to be a consistent and trusted local grocery retailer, whether a customer shops in-store or online. Greg recently said it very well. He said, we want to be the best Kroger we can be.

Got you. Very helpful. My follow-up question is on the outlook for free cash flow. Your CapEx is going to be similar to what it was last year. Free cash flow is going to be down a bit. So a, can you explain the moving pieces there? And b, what is the distribution of the CapEx going to look like? With more new stores, how much will be invested in supply chain and the digital business to remain competitive, especially as you're leaning on some of these third-party providers for more of your incremental market share within the digital arena?

Yes, Michael, let me take that one. So on free cash flow guidance, let me comment first on the cash flow number that we delivered this year. I mean we delivered a really, really strong cash flow performance in 2025 that came in ahead of the expectations. The way I'd characterize that overdelivery is kind of in 2 buckets. Number one, we've been working on a range of working capital initiatives around AP, AR, in normal buckets that you'd expect. And candidly, we delivered really well on those. And so we're really, really proud about those. And candidly, it will be an area of focus as we head into 2026 and beyond.

But there's another bucket where we had a number of timing-related items that as we built the guidance and the plans for 2026, we don't think we're going to be able to kind of lap those. So they'll effectively reverse, which is what influenced the guidance range that we've offered.

On CapEx, spent a lot of time on our CapEx, making sure that we're prioritizing investments in the right areas. The big area that kind of really steps up year-over-year is candidly on our storing program, both on new stores and remodels. And it was important for us to make sure that we had the right level of investment against that. But we went through a very, very deep prioritization exercise against all of the other areas. And I'd say the biggest area where I think we were able to optimize, it's kind of what we call sort of run the business maintenance CapEx. And I think we have an opportunity there to both optimize the returns, but also we had some things that candidly, we just didn't need to spend on. Now that doesn't mean that we're not doing the right things, not investing in the right areas, but we were able to optimize that area or spend while making sure we had the right investment on storing, supply chain, e-commerce. So hopefully, that gives you a good sense of the makeup and the priority choices that we made.

Our next question comes from Leah Jordan of Goldman Sachs.

Congrats, Greg, on the new role. I'll start with my first question for you. I know it's early days. You're still reviewing the business. But maybe if you could provide more detail on the opportunities you see regarding the in-store experience. Any color on maybe opportunities to accelerate remodels there or how you're thinking about labor hours?

Yes, sure. It is very early days. I think I have been out in stores 3 days. I've gone to manufacturing facilities, one of them and also a distribution center. So I need a little bit more time to get around the business. I'm getting out, obviously, whenever I can. And clearly, a lot of the stores I'm getting to at the moment are probably announced visits and that people are expecting me to show up. So I won't necessarily be seeing the full unvarnished Kroger at this point, but that will happen.

Look, I like the fact we're in the supermarket business. I like the fact we are primarily in the food business. When I go into stores that are sort of 50,000 square feet trading area or 70,000 square feet trading area or 90,000 square feet trading area, I like those. I think they're working really well. Now the marketplaces do too. But we're in the food business. And we generally, when we get it right, are anchored around a pretty good fresh offering, whether that's produce or meat or bakery, deli or seafood, really extensive grocery assortment. Some may argue, in some cases, too extensive. But early days, we will work our way through that.

Our Brands are powerful, and we've seen the growth in those. So you start to pull this together, and I like the mousetrap that I see at Kroger and its associated brands. But let's be clear, it's only the beginning of my fourth week, and I've only got out there 3 days plus got to 1 DC plus manufacturing facility. But I like what I'm seeing, and I see plenty of upside.

Now the obvious one, which we've picked up on the call is we've got to continue to work on price. And part of the focus that I'm going to have over this next 100 days is working with Ron and David and Mary Ellen, and [ Gia ] , all the team. It's got to be a team effort here. What else do we need to do in order to get ourselves going? Because at the end of the day, what does success look like? It looks like us selling more units. It looks like us gaining market share, and that turns into better identical sales or comp sales. And we've got some good progress.

I think Ron and the team, as I said, have done a great job building some momentum. My job now is to see whether we can operationalize that and move even faster. But the basics, I like what I see. I don't think this is about Kroger coming up with a completely different strategy. I think we've got a good strategy. It is about executing well, and it is about moving faster. So those are the sort of things that strike me after 24, 25 days.

That's very helpful and a lot we'll look forward to. Maybe just for a quick follow-up from David on the guide. For the ID sales guide, maybe just more detail on your embedded assumptions as we think about the drivers as we move through the year, especially around tonnage and market share, given Greg's comments. I came away from your earlier comments that, hey, once we get past 1Q, it's more inflation-driven, but anything else to call out there?

Yes. I mean I think inflation Leah, is kind of moderately lower than last year. So maybe let me kind of talk about the units, which I think is at the root of your question. Obviously, as Greg just said, I mean, unit growth is critical. And it's a big priority for us to improve. And as I reflect back on last year, it did improve sequentially as we went through the year, and Q4 was the best quarter that we had in terms of units.

But nonetheless, units remain slightly down. So I think as we think about the cadence for next year, the priority is keep improving and keep improving quarter-on-quarter. Our expectations are, I still think we'll see negative units in the first half of the year. But as we move sequentially through the balance of the year through a combination of our price investments, which will ramp up, new storing, accelerated e-commerce growth, there's a possibility that we move into better territory on units. But that hopefully gives you a sense of the cadence as we move through the year.

Our next question comes from Simeon Gutman of Morgan Stanley. So Greg, it's early.

Greg it is early. So you mentioned early gotten out a few weeks. Great. I want to push on this self-funding idea. It sounds like it's a goal. Curious how nonnegotiable it is, meaning that's the only way you're looking at the business? Or do you reserve the right after you've given your own time to review the plans and the business to decide if the level of savings is commensurate with the amount of value that you want to achieve?

It's a good question, Simeon, and one that I've been asking myself, obviously. When you write these things in the script, you got to be reasonably comfortable. I would say to you that I have a degree of comfort at the moment that what I've seen indicates that we will be able to do this. I think what's probably going through your mind is 2014 and Walmart. 2014, at Walmart, we were paying, I think, about $7.63 an hour, and we were losing a lot of our associates. So I knew that we would have to do something in terms of fixing that. I knew we had a lot of work to do around fresh, and we wanted to roll out online grocery. So that would require some investment.

I knew we would have to get in and do remodels and those sort of things. So I formed a view some 10-odd years ago of what was going to be required. Obviously, I've been able to get up to speed as quickly as I can here with Ron and David and the team. They haven't been sitting on their hands. They've been hard at it and made, I think, some really good decisions around Ocado, around getting new stores up and running, around getting remodels back underway.

So I'm coming in here with a business that has a good foundation, and I'm very thankful for that. And my early view, when I look at things like imports, and we don't tend to import very much in Kroger directly. So we're a big business, $150 billion. So we need to start changing our approach and start going direct to the source. Generally, any business I've been in, Simeon, there's opportunities around COGS and my sense is that's not a lot different in this business.

I have now walked 2.5 of the 4 offices that we have in Cincinnati, every single floor, meeting any associate who is on track. I've got about 6 more floors to do in this actual office here and one more building to do, but I've done another building, most of this and all of 84.51°. On top of what we're doing in the Kroger Capability Center, we can continue to look at how we take cost out. But we need to get into that Kroger Capability Center, and we need to get in there in a reasonably serious fashion, sensible, but serious and execute. So after 20-odd days, I'm sitting here and I'm saying "I'm comfortable with what I've said in the script." And of course, will know a lot more over the next 90, 100 days and as we do, my commitment, David's commitment, Ron's commitment is we're going to go and present that to you and share with you what's on our mind and that will happen well before the end of the year. But at this stage, I'm feeling okay.

And the follow-up is that if you track the improvement throughout the year in share, which culminated in share gains in Q4, is it resulting of e-commerce or stores? I mean, I think we're indifferent. And then is there any categories in particular that it was concentrated? And if you can talk about the movement about through the year?

Yes. Simeon, it's David. So just to clarify, we didn't gain share in Q4. So we still lost share in Q4, and it was a sort of -- we gained share in period 13. So I just want to clarify that. As I -- as you think about the categories where we did, in my mind, a little bit better relative to where we've sort of seen trends running, we did better in areas like meat and seafood, particularly meat, that was an area. We did substantially better in the deli and in bakery. Those were probably the 2 big areas that stood out. And I think meat, in particular, was an area where we deliberately made investments given the inflation that consumers are facing to drive units.

The churn on grocery was better.

Yes. Our next question comes from Michael Montani of Evercore ISI.

Congratulations. I'll echo to Greg. Good to have you back. If I could, I had a question for David and then a follow-up for Greg. So maybe just to start with David, could you talk a little bit about the quarterly cadence you see playing out for EPS relative to the Street. So in 1Q, you mentioned comps could be at the lower end. Does that mean we need to kind of commensurately look at the earnings growth, which is 13% there? And then anything on gross margin for the year relative to G&A?

And then the follow-up I had for Greg was just about if you think over the next several years, you've got competitors who are known for kind of winning on price, others for kind of online delivery. What do you think will be the hallmark of Kroger that allows you not just to compete, but actually to win on unit volume longer term?

So let me take that first question. So I think the only quarter that we're going to -- we've sort of specifically kind of guided on beyond the full year is on Q1. So we do expect Q1 ID sales to come in towards the lower end of our full year guidance range. Specifically, that's really mainly to do with the headwinds that we're facing on lapping eggs. And so I think the cadence in Q1 is primarily driven by that.

I think as you then think about gross margin, you'll see a similar thing. I think our gross margin will be lower in Q4, again, as a result of some of that egg deflation that we're seeing and then be broadly consistent throughout the year. but still positive to be clear, still positive in Q1, but slightly below the full year expectations. And then I think EPS guidance or EPS, again, slightly lower towards the lower end of the range in Q1 and then fairly consistent as you head through the year.

Thanks, David. Michael, to your second part of your question, I guess there are 5 things that come to mind as to why I am excited. I actually think I've got the best retail job on the planet. I'd begin by saying and echoing the point that Ron made, this is about being the best Kroger we can be. It's not about us trying to be someone else. And what I like about Kroger, I guess, are 5 things.

I like the fact that we've got a business which is pretty well anchored in fresh foods. We've got a business that can be very convenient and fast for shoppers, size of our stores, where they're located. I like the fact that as we work hard to get affordable, customers are going to have a choice. They can go to a really low-price discounter and not get quite as much assortment, maybe not get as good a fresh or they can go to Kroger or a Kroger banner and they're going to get a better experience. And for them, that will represent better value because we are affordable.

I like the fact that we are local. Now I haven't got all around the country, obviously, after 20-odd days, but I know a little bit about it. I've been to all parts of America previously. And I like the fact that Kroger has different brand names and it's seen as being local in the community. And then finally, having spent a bit of time down at 84.51° and seeing what we can do there and the caliber of the people, I like the fact that we can be pretty personal. And as you think about digital and where that's going, and we had the question previously on AI. I like the fact that we can be for you. We can deliver things for customers, that are specific to those customers. So I'm pretty excited about how the business is positioned. I think it's a great business. We'll be the best Kroger we can be.

Our next question comes from Ed Kelly of Wells Fargo.

Welcome, Greg. I wanted to ask, as you think about pricing and price gaps, and there's been a lot of talk about investment in price today. And I think Kroger has historically said, you don't need to be on top of Walmart. You just need to be close enough to win in a lot of your other competitive advantages. Can you talk about where the gap is today and where you think this gap needs to go? And then specifically, Greg, for you, my big picture question, I think, is there are a lot of cost saves in the business that you can attain. You want to keep a balanced approach, but the industry is moving rapidly. And are you moving fast enough with these initiatives? Or maybe better said, why not go faster?

Ed, it's David. Let me take this initially, and then I'll ask Greg maybe to kind of come in on sort of more on sort of core principles. So I think when we think about price spreads relative to the competition, we look at a number of things. Number one, we're looking at this from an item perspective. So there are certain items that you want to make sure that you are right there with the competition on. And then there are certain items that philosophically, we think it's okay to operate within a certain spread.

So we also then look at this from -- we obviously track every day price spreads, so kind of nonpromoted. But given we're a high-low retailer, it's also very, very important that we look at this all in. So we've been seeing this kind of improve throughout the year. And that is why we are putting a significant amount of money into this next year because we want to make sure that we're continuing to ensure that consumers have good value both on an everyday basis, but also when you look all in on a promotional basis.

So I think, listen, our objective is, as you said, it's not necessarily to be right there with the competition every day, but there are a certain set of items that are important from a basket perspective that we do need to be there right there with the competition.

I think the other thing, Ed, that's really important for us, and we hear consistently from our consumers is about simplicity. And one of the things consumers tell us is, "hey, it's just really complicated to figure out whether I'm getting the best price at Kroger" just because of the way some of our offers are structured. And so we're also doing work to make sure that we structure our offers in a more simple way so that they get good prices and they can understand them.

And that's really important because not only is the price important and the value that they get is important, but also the value perception. And I think there's certainly many arguments to suggest that price perception is equally as important as the price itself. So those are our focus areas, and I don't know whether Greg or Ron, you want to add anything.

Look, I think you said it extremely well. It is a combination of some KPIs, and it's also making sure we get the basket where we need to be. And there are some added value things that occur when you shop at Kroger that mean you don't have to necessarily match Aldi or anyone else in every single price point.

The customer works out what the value equation is and our job is to make sure that we deliver that.

Great question on speed. And I've said this a couple of times already, but I'm coming into a business where Ron and David and the team have already got a momentum shift in the organization. There's been a lot of work over the last year already on price. There's a lot of work that's been done on store execution. There's a lot of work done around e-commerce. And these have been very difficult but important decisions.

There's work underway on accelerating the store footprint. There's work that's been done on getting out of noncore assets and of course, some good leadership appointments, not mine, other good appointments in the business. So I'm well aware that you get 1 point for talking and 9 for doing. And part of what we're doing over the next sort of 90, 100 days is we're working hard now to take what we've got here as a strategy and building that out some further and then making sure that we've got the math around that so that we're comfortable with it.

We'll talk about that with Ron and the Board in detail. We'll then make sure that we've got it all buttoned up internally with our own team. And then we've got the people in place to execute this at speed. And that's going to be important. You're right that our competitors don't stand still. At the moment, they're going around that racetrack at a pretty good pace. We not only have to catch up to the pace that they're going, but we actually have to learn to go faster so that we can pull back on where they were. I'm looking forward to that challenge. I've never been more excited about the opportunity. And I think we have the assets, most importantly, in our people to deliver that.

And Ed, I'm just piling on a little bit, but our research would indicate that customers are really looking for value. And each customer defines that a little differently. And obviously, rewards is part of our offering, whether it's fresh categories, store conditions, great service, all those things are part of the equation. And I think it's more than just price.

Our next question comes from Robert Ohmes from Bank of America.

Greg, congrats. I look forward to seeing you again. And maybe for David and Ron, the -- actually, 2 questions. Just the first is just on accelerating e-commerce. I know it's early days, but any drivers to that beyond DoorDash and Uber Eats? I mean, are there other things that you guys are looking at, new strategies in either delivery or things that you're not doing? And then the other question, just maybe for David, fuel sales and profitability in 2026 might be tricky given what's been going on with oil prices. I would just -- any guide on what you guys are assuming in the guidance for the fuel business sales and profit headwinds?

Yes. I'll just start with the e-commerce. We're really excited about 20% growth in the fourth quarter. I said in the script that we plan to be profitable during 2026. The reality is we plan on being profitable in the first half of '26. In terms of how we're doing it, basically, we're working on a lot of different areas to just improve the experience with our customers. And whether that's the refreshed website, whether that's a lot of initiatives around AI and Agentic shopping. In-stock is a big focus, delivery service. So all of those things, those nuts and bolts things are really important to the growth of e-commerce this quarter. Obviously, the new partners help and will continue to help. And we are growing e-commerce business much faster than the market. And then as we mentioned, I think the third-party partners are on track to be over $1.5 billion on top of our organic growth in e-commerce this year.

Yes. Robert, let me take the question on fuel. So in the guidance and our plans for next year, we are expecting fuel gallons and profits to be slightly down year-over-year, a combination of gallons and margins.

Our final question for today comes from John Heinbockel of Guggenheim.

Two quick things. David hit on value perception. So when you think value perception as a lead indicator for food volume, your thought on that and by how much might it lead because I suspect your value perception is better than reality today. Thoughts on that. And then secondly, center store SKU rationalization, right, and the ability to tighten that up and then for what you do sell to have sharper, simpler prices, those 2 topics.

Yes. It's a very good question and one that I could spend a long time on. And hopefully, we will get some time and I can spend a bit more time than what I'm going to at this stage. As David said, it's going to be a combination of KPIs and basket and making sure that we hit the right value equation, which is a combination of what the actual cost is and the quality perception that customers have. So we're working on that at the moment. That's a homework assignment, which is happening right now in the business so that we can put some math against exactly where we need to be.

And we're not going to be able to do whatever we want to do in a matter of months. It needs to be a little bit like a glide path and the analogy that I've been using is it's a bit like a Boeing 787 coming into JFK, you're at 42,000 feet, you burned off all your fuel, and you've got to get down to basically sea levels. So you start at about 30 minutes out and your glide path your way in. So that's how we'll think about it, but the glide path can't go on forever, and we'll come back to you with the timing and how that looks.

In terms of it all, it is a bit of an ecosystem when you think about it. If you want to improve your e-commerce business and you're going to do more picking from stores, you need to make sure that you've got the right assortment on your website, but just as importantly, that, that assortment fits comfortably on the shelf because you want your first-time pick rate to be really good and you need that to be efficient. So the team that are doing center of store need to make sure that the planograms are where we need them to be. So my comment around we need to think carefully is based on sort of 3 to 4 days out in stores where at times, we're probably trying to put 4 pounds of sugar in a 2-pound bag and it makes it a bit difficult to get all that assortment on the shelf comfortably. That in turn means that your top shelf comes under a bit of pressure. In turn, that makes picking for online grocery a bit harder. The associates find it a bit more difficult. There's a bit more stock sitting in the back room.

So it all starts to become the sort of virtuous loop. And part of what we're starting to think about now is how we go about getting to a situation where you optimize the individual components, but really what you're doing is that you're optimizing the total ecosystem. And that requires everyone to play together in a team and do that quickly. So that's the sort of thing that we're now thinking about. Lots of detail that I could put into that because I haven't even spoken about what does that mean in terms of promotions, and you heard from Ron and David that there's some complexity around that. And I've picked that up just already in the 20-odd days that I have been around the place. So we've got to think about how we gradually take this Boeing 787 at 42,000 feet and just glide path it in and keep everyone on an even keel and land this plane safely. But the objective is to do that and to win. We didn't come and invest in all this so that we can come second. So that's on my mind as well.

I will wrap up, if that's okay. Thank you all for the questions. And just as I close, I would like to share a few comments with our associates listening in. I have spent time visiting stores, as some of you have seen, also distribution centers and a manufacturing facility and of course, getting around our offices. And I just want to tell you that I've seen the energy and the pride that all of you are bringing to work every day.

So from the associates stocking our shelves and helping customers to the teams in our supply chain support centers, keeping this business running, you are what make Kroger great. So thank you for what you do. I'm incredibly excited to be on this team, and I'm looking forward to getting out and visiting more locations and meeting more of you in the weeks ahead. Thank you, everybody, for joining us on this call this morning.

Thank you all for joining today's call. You may now disconnect your lines.

Good morning, and welcome to the Kroger Co Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Rob Quast, Vice President, Investor Relations. Please go ahead.

Good morning. Thank you for joining us for Kroger's Third Quarter 2025 Earnings Call. I am joined today by Kroger's Chairman and Chief Executive Officer, Ron Sargent, and Chief Financial Officer, David Kennerley. Before we begin, I want to remind you that today's discussions will include forward-looking statements. We want to caution you that such statements are predictions, and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger Company assumes no obligation to update that information. After our prepared remarks, we look forward to taking your questions. In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to 1 question and 1 follow-up question, if necessary.

I will now turn the call over to Ron.

Thank you, Rob, and good morning, everybody. Thank you for joining our call today. We're happy to deliver another quarter of strong results, reflecting meaningful progress on our strategic priorities. This quarter, we continue to focus on what matters most, serving our customers, running great stores and strengthening our core business. These efforts are improving the customer experience and creating a strong foundation for long-term growth.

Today, we're going to talk about the things we got done this quarter, the proof points of our progress and the ways we're positioning Kroger for continued success. I'd like to start with sharing the results of our e-commerce strategic review. It marks an important step in how we're evolving our business to meet customer needs and also to improve profitability.

In today's world, having a strong e-commerce offering is key to delivering a differentiated customer experience and also represents an important growth driver for our business. We've made good progress, building a more than $14 billion business and achieving 6 consecutive quarters of double-digit sales growth. Earlier this year, we formed our new e-commerce team headed by Yael Cosset designed to align all of the teams who contribute to the online customer experience.

By bringing these teams together, we've created a more integrated structure to support our strategy. Building on that foundation, we conducted a comprehensive review of our entire e-commerce model. This review helped us to identify where we can be more efficient and better meet customer demand.

Customers increasingly value speed, flexibility and convenience and better leveraging store-based fulfillment helps us meet those expectations. As a result, we're evolving our hybrid fulfillment model by using automated fulfillment in geographies where customer demand supports it and also leveraging store-based fulfillment through our pickup business and relationships with well-established third-party delivery partners. These changes are fully consistent with our broader organizational goals to improve operational efficiency, to drive profitability and to more effectively utilize our stores.

We will make these changes to our network through a phased approach, ensuring we maintain flexibility to adjust our plans while minimizing operational and customer disruption. In recognition of this shift, we announced the closure of 3 automated fulfillment centers that haven't met operational and financial expectations. We expect these fulfillment centers to close by the end of January 2026. Based on our customer and store level analysis, in those geographies where we will close sites but continue to operate stores, we expect to retain most of our customers and their e-commerce spend through store-based fulfillment and in-store shopping.

We expect these closures to have a neutral impact on identical sales without fuel. With more fulfillment occurring in stores, we recently expanded our relationships with third-party delivery providers, Instacart, DoorDash and Uber Eats. By using our store network, we're improving both geographic coverage and speed with delivery in as little as 30 minutes. Each of our delivery partners brings unique strengths and specific benefits to our customers. They will also create new opportunities for our media business, both on our platform and on theirs, something David will cover later.

So in summary, this refreshed hybrid model helps us to attract new customers, improve delivery speeds and leverages our growing store network. We expect these decisions to contribute approximately $400 million in e-commerce profitability improvements in 2026, making our e-commerce business profitable in 2026.

Turning now to store operations, running great stores and delivering an exceptional customer experience are central to our strategy. Our internal composite scores, which measure key metrics such as in-stocks, fresh quality and customer service continue to show steady improvement. We're also investing in experiences that matter most to our customers, including adding store hours to improve checkout speed, increase service and improve in-stocks.

These investments are delivering tangible results, including significant year-over-year reductions in wait times for our customers. To support these changes, we're utilizing an AI-powered workforce management platform, which enables better coverage during peak periods and gives associates greater flexibility. This tool combines real-time labor insights with intelligent scheduling, allowing store leaders to proactively fill open shifts and ensure the right staffing at the right time, especially during high demand periods like weekends and holidays.

Finally, as part of our commitment to simplifying our business, we are making good progress in reviewing all noncore assets to determine their ongoing contribution and role within the company. All of these actions strengthen our business and position Kroger for long-term growth.

Before I talk about the results, I want to take a moment to just share what we're seeing from customers and how that's shaping our approach going forward. Macroeconomic uncertainty continues to influence customer behavior, and we're seeing a split across income groups. Spending from higher income households continue strong, while middle income customers are feeling increased pressure similar to what we've seen from lower income households over the past several quarters. They're making smaller, more frequent trips to manage budgets and they are cutting back on discretionary purchases.

Food spend has been more resilient than nonfood spend. Categories like natural and organics continue to perform well, reflecting continued interest in healthy and premium options. At the same time, customers are turning to promotions and our brands as smart ways to save without sacrificing quality.

Ready-to-eat and other meal solutions are providing another way for households to get quality and convenience at a great value. Inflation and uncertainty around government funding combined with the pause in SNAP benefits during the final weeks of the quarter, added incremental pressure to our third quarter identical sales without fuel. These trends reinforce the importance of delivering value through lower prices, affordable quality in our brands products and more promotions for customers to save.

Turning to our third quarter results. Identical sales without fuel grew 2.6% year-over-year and accelerated on a 2-year stack basis, up 4.9%. Sales growth was led by pharmacy and e-commerce. Gaining market share continues to be a top priority. In a challenging macroeconomic environment, we delivered share trend improvement again this quarter after adjusting for closed stores, reflecting the progress we're making in strengthening our competitive position. We also increased our price investments this quarter.

Toward the end of the quarter, when SNAP benefits were held up, we increased promotions to help customers save. We are disciplined in those investments, balancing our gross margin rate to ensure we deliver value in a sustainable way. Our brands had another strong quarter with sales outpacing national brands. Customers continue to choose these products because they deliver high quality at a great value.

Our premium lines, Simple Truth and Private Selection were the strongest performers again this quarter. Our brands products carry a more favorable margin profile and also improved profitability during the quarter. These results highlight the strategic importance of our brands, driving sales, building loyalty, and improving profitability.

E-commerce sales were strong again this quarter, growing 17%, led by delivery. We also improved e-com profitability with both pickup and delivery showing strong quarter-over-quarter improvement. We're encouraged by the early results from our DoorDash relationship in its first month alone, we fulfilled 1 million orders, bringing new customers and incremental meal occasions to Kroger. As we evolve our hybrid model, we expect to continue to ramp up both sales and profitability. This quarter's results show the progress we're making. We also know we have more to do. Looking toward the future, as we've shared previously, we're accelerating expansion of our store footprint.

We expect to break ground on 14 new stores in the fourth quarter, marking a meaningful acceleration in activity. Earlier this quarter, we announced expansion plans for Harris Teeter, one of our strongest and most successful banners. These plans include opening additional new stores in the Southeast and entering Jacksonville, Florida, which is an important adjacent geography that positions us to grow households and gain share.

Looking ahead, we plan to accelerate capital investment in new stores beyond 2025 to strengthen our competitive position, expand into high-potential geographies and support long-term growth. As we expand our footprint, our approach to site selection and store format starts with the customer, then prioritizes improving ROIC with a focus on delivering greater shareholder value. We also see significant opportunity to continue taking costs out of our business, starting with procurement, both cost of goods sold and goods not for resale are areas with significant potential for savings, and we are acting to capture those benefits.

At the same time, we are rethinking how we work. This includes leveraging technology and artificial intelligence to simplify tasks and operate more efficiently, putting talent closer to the customer and building a more streamlined organization. As part of this effort, we are returning to in-office work 5 days a week to strengthen collaboration, accelerate decision-making and better support our stores.

Working together also creates a better environment for our associates to learn and develop. These changes will allow us to move faster and lead to a more efficient organization. We're also looking to emerging technologies, such as Agentic AI to enhance the customer experience. We plan to introduce new Agentic shopping capabilities, starting with Instacart's AI-powered card assistant on the Kroger website and mobile app in the first quarter of 2026.

The card assistant will help customers shop more effortlessly by making it easier to build personalized baskets, find meal ideas and save time. We'll embrace this technology while making sure it complements what differentiates Kroger today, fresh products, unique our brands products and an industry-leading loyalty program. While the landscape continues to evolve, we're confident we'll be able to use technology to improve the customer experience.

Finally, we're continuing the foundational work towards refreshing our go-to-market strategy with the customer of the future in mind. This includes a deep dive into customer data and a rigorous assessment of our competitive positioning. This work is shaping the foundation for our next phase of growth.

Now I'll turn it over to David, who will review our financial results in more detail. David?

Thank you, Ron, and good morning, everyone. Kroger delivered another strong set of results this quarter, driven by solid execution in our core grocery business and continued growth in e-commerce and pharmacy. In a challenging environment, marked with cautious consumer spending, the government shutdown and a pause in Snap distributions we improved market share trends, excluding the impact of store closures by delivering meaningful value for customers. We delivered these results while continuing to balance the right investments for the customer with disciplined margin management.

I'll now walk through our financial results for the third quarter. We achieved identical sales without fuel growth of 2.6% moderating slightly from last quarter as we cycle the impact of last year's hurricane Helen and Port strike as well as the pause in Snap distributions during our final week of the quarter. On a 2-year stack basis, identical sales without fuel accelerated by 20 basis points to 4.9%, reflecting continued strength in our business.

Our identical sales without fuel growth was again led by strong pharmacy and e-commerce results. Food inflation increased moderately compared to the prior quarter with notable inflation in certain commodities, particularly beef. Our pharmacy business delivered another strong quarter fueled by growth in both core pharmacy scripts and GLP-1s. While the strong growth in pharmacy sales impacts our margin rates, it contributes positive gross profit dollar growth and supports our overall operating profit.

Our FIFO gross margin rate, excluding rent, depreciation and amortization and fuel increased 49 basis points in the third quarter compared to the same period last year. The improvement in rate was primarily attributable to the sale of Kroger Specialty Pharmacy, our brands performance, lower supply chain costs and lower shrink partially offset by the mix effect from growth in pharmacy sales, which has lower margins and price investments.

After excluding the effect from the sale of Kroger Specialty Pharmacy our FIFO gross margin rate increased 24 basis points. As we communicated last quarter, we expect our gross margin rate for the full year on an underlying basis to be relatively flat as we balance the impact of pharmacy mix margin enhancement initiatives and price investments. The operating, general and administrative rate, excluding fuel and adjustment items, increased 27 basis points in the third quarter compared to the same period last year. The increase in rate was primarily attributable to the sale of Kroger Specialty Pharmacy and investments in associate wages and benefits, partially offset by lower incentive plan costs and improved productivity.

After adjusting for the sale of Kroger Specialty Pharmacy, our adjusted OG&A rate increased 9 basis points on an underlying basis. As we did in the first quarter this year, we took the opportunity to make an accelerated pension contribution in Q3, which was worth 8 basis points on our OG&A rate. This reflects a proactive approach to reducing future liabilities and most importantly, help secure long-term benefits for our associates.

Our LIFO charge for the quarter was $44 million, compared to a LIFO charge of $4 million last year, resulting in a $0.04 headwind to EPS this quarter. Our adjusted FIFO operating profit in the quarter was $1.1 billion, and adjusted EPS was $1.05, both reflecting 7% growth compared to last year. Fuel is an important part of Kroger's strategy and builds loyalty with customers through our Kroger Plus fuel rewards program. Fuel sales were lower this quarter compared to last year, attributable to fewer gallons sold. Fuel profitability was in line with expectations, just slightly ahead of the same period last year. We expect gallons sold to remain lower on a year-over-year basis for the fourth quarter.

Turning now to e-commerce. Our e-commerce business delivered 17% growth this quarter, driven by an increase in both households and order frequency. Orders delivered within 2 hours or less, grew by more than 30%, reflecting the growing media [indiscernible] demand. Building on what Ron shared earlier, the recent update to our e-commerce strategy reflects a thoughtful evolution of how we serve our customers and drive sustainable growth.

Our refreshed hybrid fulfillment model allows us to leverage the strength of both automation and store-based fulfillment to meet evolving customer expectations. This also allows us to optimize the performance and use of automated fulfillment centers when the right conditions exist and utilize third-party partners for faster delivery while reaching new customers and incremental trips. Our new model positions us for both strong, sustainable growth and improved flexibility.

From a financial perspective, we're significantly accelerating the profitability of our e-commerce business. closing 3 fulfillment centers and increasing store-based delivery will deliver approximately $400 million in incremental e-commerce operating profit in 2026. As a result, we now expect our e-commerce business to be profitable in 2026. The benefits from these decisions will be primarily used to reinvest in our business to increase value for customers and improve the shopping experience as we look to accelerate sales. We also remain focused on expanding operating margins and a portion of these benefits will be used to increase shareholder value. Given the financial performance of our automated fulfillment network and the closure of specific sites and as previously announced, we recorded an impairment and related charges of $2.6 billion in the third quarter.

We will continue to monitor our retained sites with a focus on improving operating efficiency and strengthening financial performance. Our updated hybrid model also creates new opportunities for our media business. Our broad reach and unmatched food retail capabilities are attractive to delivery partners and we structured these relationships to benefit our media business. For example, our unique approach to collaboration with Instacart, DoorDash and Uber unlocks new media opportunities across both platforms and we're already seeing strong interest from several large CPG brands.

By integrating our customer data and loyalty insights with third-party platforms, we can bring more targeted and innovative media campaigns to reach new customer segments and create additional monetization opportunities. Our media business had a strong quarter with double-digit growth and continues to be a meaningful contributor to profitability. We're encouraged by the momentum and believe we have an opportunity to accelerate growth even further as we leverage new capabilities and improved coordination between our media and merchandising teams.

I'd now like to turn to capital allocation and financial strategy. Kroger delivered strong adjusted free cash flow this quarter, which reflects the strength of our operating performance. Free cash flow is important to our model, providing liquidity for our operations and strengthening our balance sheet. At quarter end, our net total debt to adjusted EBITDA ratio was 1.73%, which is below our target ratio range of 2.3% to 2.5%. This provides us with financial flexibility to pursue growth investments and other opportunities to enhance shareholder value. We expect to return to our target leverage ratio over time and we'll share more details about our plans for 2026 next quarter.

Our capital allocation priorities remain consistent and are designed to deliver total shareholder return of 8% to 11% over time. We are focused on investing in projects that will maximize return on invested capital over time while remaining committed to maintaining our current investment-grade rating, growing our dividend, subject to Board approval, and returning excess capital to shareholders. During the third quarter, we completed our $5 billion ASR program under Kroger's $7.5 billion share repurchase authorization. We are currently executing open market repurchases and expect to complete the remaining $2.5 billion under the authorization by the end of the fiscal year, which is contemplated in full year guidance.

Improving ROIC is a key priority. As we shared earlier, we expect our updated hybrid e-commerce model and investments in new storing to drive stronger returns going forward. Building on that, we continue to sharpen our focus on cost structure. We've made meaningful progress so far, but we see greater opportunities ahead by modernizing operations and ways of working across our organization, from stores to support centers. We also see opportunities to improve procurement to unlock additional cost savings. The combination of disciplined cost management and capital deployment positions Kroger to deliver stronger returns and create more shareholder value.

I would now like to provide some additional detail on our outlook for the rest of the year. We are pleased with the continued momentum in our business, supported by strong performances in pharmacy and e-commerce. Given our year-to-date results and outlook for the remainder of the year, we are narrowing our range for identical sales without fuel growth to a new range of 2.8% to 3% and raising the lower end of our adjusted earnings per share guidance to a new range of $4.75 to $4.80.

This includes the impact of LIFO which is now expected to be a $0.07 headwind compared to what we expected at the start of the year. As we move into Q4, we expect a slight improvement in our OG&A rate to help mitigate the impact of a slight decline in FIFO gross margin rate. One additional factor to note is the impact of the inflation Reduction Act on our pharmacy business. Beginning on January 1, this legislation is expected to reduce Medicare drug prices on 10 highly utilized medications.

Sales on these medications will be recorded at the new reduced prices. Kroger will continue purchasing these drugs at current acquisition costs and manufacturers will fully reimburse Kroger for the difference through rebates, which will then be recorded as an offset to cost of goods sold. As a result, we expect that this will lower Q4 identical sales without fuel by approximately 30 to 40 basis points, but will have no impact on our earnings. This is reflected in our updated guidance.

I will now turn the call back to Ron.

Thank you, David. In closing, we're encouraged by the progress we're making. Our priorities are clear and we're executing with greater speed and discipline. We're strengthening our core business and investing in areas that will contribute to long-term growth. We're taking decisive actions today that will make Kroger stronger now and in the future and deliver greater value for our shareholders over time.

Before we move into Q&A, I want to provide a brief update on the CEO search. Our Board remains actively engaged and is making good progress. While we don't have a specific time line to announce today, we're engaged in a thorough process and expect to appoint a new CEO during the first quarter of 2026.

We'll now open it up for questions.

[Operator Instructions] The first question goes to John Heinbockel of Guggenheim.

Ron, can you talk to -- the accelerated storing program, right? Maybe talk about that cadence. And then when you think about, you've got obviously a fairly far-flung network. How do you think about concentrating that -- and as part of this -- I know the digital review is different. When you think about the portfolio that you currently have, is there -- are there opportunities? Are you looking to -- do you exit some places? Do you double down in others as part of the storing effort?

Sure. Let me kind of try to answer several of those questions. First of all, we're pretty excited about kind of the new investments in storing because that drives a lot of goodness from the top line and the same-store sales line. And we think we've got a great long runway to grow stores. I think when you think about the things that go into making stores successful, obviously, the right location, the right market, you've got to have great operational infrastructure as well as talent.

And obviously, you're not going to open a store unless you think it's going to deliver a terrific return. In the fourth quarter, we're going to complete about -- or in the fourth quarter, we plan to complete about 4 major store projects. We're going to break ground on another 14 stores. And when you look at 2026, we expect to increase new store builds by 30%. In terms of -- and I guess the other thing I should just mention is how excited we are about our entry into Jacksonville with Harris Teeter.

Harris Teeter runs a great business. They already operate in Florida in Amelia Island, which is about 40 miles from Jacksonville, Florida itself is a large state. It's a growing state, we expect to do very well there. I think Jacksonville is the tenth largest city in the United States, and I think it's the largest city in Florida. And I think that's kind of an indication of we're going to continue to expand in adjacent markets. I think we also have opportunities to grow through acquisition, and we haven't ruled that out despite our last few years with Albertsons. And I think when you look at our long-term aspiration, we expect and plan to be a national retailer.

So I'm not sure that answers all your questions. Concentration is important. We'll certainly fill up Jacksonville before we move to adjacent markets. But we think we've got great opportunities to grow stores. And I think, frankly, that's been one of our biggest challenges over the last few years is we haven't allocated enough capital to growing stores because we have allocated a lot of capital in other areas like fulfillment centers.

Great. And maybe just a follow-up, totally unrelated. The CEO search has been one of the longest, right? I think we've seen it in a while. I'm curious, you and the Board, what are you looking for? Maybe characteristic-wise, capability-wise. And what does the business need from that person?

Sure, yes. I think as you know, we've been pretty deliberate in the process. We've also been very thorough in the process. We're working with an executive search firm and we have identified and engaged with really several very highly qualified candidates. I think we have announced publicly that our next CEO will be external. And I think we expect them to bring in fresh perspectives to the organization and also to complement the culture that we have today, which is pretty strong at Kroger as well.

In terms of what we're looking for, we want a deep understanding of retail transformation. We want somebody who is very close to the customer. We want somebody who has demonstrated success operating at scale, who knows how to operate and frankly, cultural fit and an alignment with Kroger values is critical as well. And like I said, we're getting closer. We're making good progress, and we expect that decision will be announced in the first quarter.

Next question go to Ed Kelly of Wells Fargo.

I wanted to -- maybe first, Ron, could you just kind of step back and maybe talk about how you're feeling about the current grocery ID trend? It seems like you want that to be better. The competitive environment, it seems like it may be picking up a bit. And you did mention some investment in price towards the end of the quarter. How should we think about all of that in the context of maintaining underlying gross margin stability going forward. And I think what you are implying for next year based upon what you're talking about e-com is EBIT, at least maybe some EBIT margin expansion.

Sure. Yes. Let me just talk a little bit about sales. I think this morning, we announced that sales came in a little lighter than we expected, and that was primarily later in the quarter. And that's due to a combination of factors. We saw increased caution and uncertainty among consumers, particularly in October and November due to the concerns about the government shutdown. Also the pause in SNAP benefit distributions created some headwinds at the end of the quarter. I think consumers are becoming more selective. They're buying more on promotion. They're reducing the discretionary purchases, things like general merchandise, general merchandise comped negative during the quarter.

And also, we had a tougher ID comparison in Q3 from the prior year. Despite all that, our 2-year stacked identical sales were up 20 basis points, and I think that might have been one of the higher quarters of the year. But I think what we're doing going forward is our focus remains on value and serving customers during a pretty uncertain time. If you look at Q4, well Q4 to date, we're feeling pretty good about our quarter-to-date sales. We're slightly ahead of our guidance that we provided this morning. But we don't anticipate any meaningful improvement in the consumer environment in Q4.

Also, when you do the math, looking at the top line, we're also going to lap harder comparisons in Q4. Last year, we benefited from some weather and maybe we'll have weather again this year. Also, we benefited from egg inflation last year that we won't see this year. And then finally, and I think David mentioned this one is we'll see some headwinds relating to the inflation Reduction Act in pharmacy, and that will hit us in January to the tune of about 30 basis points in overall ID sales. You asked about competition. I think the environment remains very competitive as it always is in the retail world.

I think especially true today when consumers are looking for great value. Frankly, our focus is just running the Kroger playbook -- we want to run great stores. We want to drive e-commerce business. We want to grow alternative profits. We continue to lower prices. We took down another 1,000 items in Q3 and I think we will continue to ramp up promotions during the holidays to drive traffic as well as basket sizes. The good news is that vendor funding continues to be strong to support our initiatives.

Maybe I'll give you one example of that on the Thanksgiving meal bundle that we announced a few weeks ago. We lowered the price this year over last year. And we did not cut the menu to do so. I think the bundle fed 10 people for less than $5 per person. So in answer to your question, yes, the environment remains competitive, and we expect that to continue.

Just a couple of things to build on Ron's comments. I think also important to note that in the quarter, our share trends improved. So despite the impact on sales from the things that Ron talked about, we saw sequential improvement in our share trends, which was good. And then in terms of gross margin, I think Q3 shows that we manage gross margin in a very, very responsible way. And I think despite what we've guided to for Q4, you guys should think about us continuing to do that in a responsible way. If you look at actually the breakdown of gross margin, selling gross itself actually declined as we invested in pricing, but we were able to offset that with mix on our brands, good sourcing improvements, shrink and other supply chain costs. And I think I'd expect a similar dynamic to what we saw in Q3 going forward.

The next question goes to Michael Montani of Evercore ISI.

Yes. I guess one thing that I was going to ask about was when you look at the pharmacy drug pricing headwind, should we anticipate that, that annualizes closer to 100 bps for next year? That was part one. And then part 2 is just -- can you parse out some of the tailwinds you might have to offset when you think about Express Scripts impact? Where is that now? How does that mature DoorDash and Uber Eats.

Just trying to see what there might be there as offsets.

Thanks for the question. It's David here. So obviously, we're not getting into 2026 guidance today. We'll obviously get into more details on that in our next quarterly earnings. But let me just add a little bit more color on the inflation reduction impacts that we'll see this quarter? And then how you might think about some of the tailwinds that we've got.

So I think to provide a little bit more detail. So starting January 1, Medicare will pay 60% to 70% less for the first 10 negotiated drugs. And I think important to stress that this is really only Medicare. Those lower reimbursements will translate into lower sales, i.e., the price at which we sell and that creates the headwind that we've talked about. I think also important to note that manufacturers will offer rebates to us to offset that -- so this will have no margin impact in the quarter and no earnings impact, and we expect that dynamic to continue on an ongoing basis. As we think about the tailwinds that we have, to maintain really good performance in our ID sales.

Our long-term trends are -- we're seeing units improve in our core business. We've got expecting to continue to invest in making sure our price gaps. We've got headroom on our brands, we've got, I think, a whole range of different initiatives to keep core momentum in our business moving along strongly to offset some of the impacts from what we're going to see going forward on our pharmacy business.

The next question goes to Kelly Bania of BMO.

Can you just maybe help parse out more specifically the impact of pharmacy on the quarter? It sounds like you're estimating some slight market share improvements. But I think a lot of investors are really just trying to understand what's happening with the core grocery business with inflation and units and market share? Any color you can give there? And then also just going back to the the reinvestment of the e-commerce losses. Maybe can you talk about how much you're planning there? How much is planning to go towards price versus store standards and maybe just your assessment of those 2 key factors on where your price positioning is and your store standards?

Is this going to be a broad-based investment across many stores, more targeted in certain areas? Any color on how we should think about that and what that might do for next year.

Kelly, let me take that initially, and then I'll turn it over to Ron. So I think pharmacy in the quarter I would think of the impact of pharmacy business similar to what we've been seeing over recent quarters. So I don't think there's a material change in what we've seen from a pharmacy performance this quarter.

I think your second question was around units and what we're seeing on the core business. We did see a slight deceleration in our unit trends in Q3 if you sort of dissect where that's coming from, actually discretionary categories were probably the most impacted. We also saw some impacts in our meat business due to the higher inflation that we've been seeing. But I think it's also important to say that actually unit trends improved or held up in a number of areas.

We saw good improvement in the deli. And actually, natural and organic foods held up really, really well. I think these trends changed given some of the broader dynamics that Ron talked about at the beginning, snap and the sort of broader macro consumer environment.

In terms of the tailwind that we have next year from our e-commerce business, we haven't yet declared how we're going to split that money up. Obviously, we'll provide more details when we get into 2026 guidance. But as we've said, we expect to use some of the money to reinvest back into pricing to make ourselves even more competitive. We've got a whole range of different opportunities to invest to improve the customer and in-store experience, which we believe will also help improve composite scores but we're also committed on an ongoing basis, as we've said, to improve the operating margins of the business, and we expect to do that next year as well.

And David, the only area I would add would be kind of technology. I think we've got some technology spend that is in the pipeline that we want to make sure that we can continue to grow not only our retail business but also our e-commerce business, which is rapidly evolving.

The next question goes to Michael Lasser of UBS.

Two-part unrelated questions. The first is, as you went through your e-commerce review, how did you think about the risk of leaning so heavily on third-party providers to fulfill a core competency, which is to interact with the customer at the point of delivery versus having that function more in-house? And also, as part of the e-commerce review, you mentioned that it's going to be profitable next year.

Is that simply a function of the $400 million of losses going away? Or are there other factors that we should consider to drive that profitability? And just one last unrelated point. As you think about 2026, do you expect the rate of growth for the grocery industry just to be more sluggish overall, given this 100 basis point headwind from the pharmacy change along with what could be a headwind from MAX next year?

Sure. I'll start, and then I'll turn it over to David. In terms of -- you asked the question about the providers that are going to be doing some more of our delivery one, we're really excited about the connection. I think each of those partners really brings distinct customer -- serve distinct customer needs as well as occasions. Some are full basket stock up delivery companies and some are really more about immediate convenience. I think we're looking at these incremental -- as these partners as incremental sales opportunities and customer opportunities. The vast majority of our e-com sales come from the Kroger website. And we feel like they give us operational flexibility as well as strategic flexibility.

If you think about Instacart, which is our largest partner, they deliver broad geographic reach. They've got great scale. They can handle very large basket sizes. They also -- we also can offer a genetic shopping capability on Kroger's iOS platform. Uber Eats that leverages Uber's existing customer base and the Uber app. And I think the benefits here are add-on economics, customers can order grocery items and do with the restaurant orders. And that certainly appeals to younger customers who want more speed, more convenience. And I think those are -- represent new and younger customers for the company.

And then DoorDash, David talked about how successful that launch has been. And there, again, we're focusing on speed. We're focusing on convenience. It is ideal for quick small basket needs and again, it appeals to younger customers. In terms of the $400 million, I'll ask David to weigh in on that one.

Yes. So Michael, the way I think about e-commerce profitability is I mean, as we've been saying, we're already making good improvements in profitability on the business that as it exists today. In fact, in a we actually cut the losses that we've been making in half. So we're making really, really good quarter-over-quarter improvements in profitability, and I expect that to continue into next year. You then take the $400 million that we've talked about, which is from closing the automated fulfillment centers.

You then add in the business that we believe is highly incremental from the new third parties that we're working with, so DoorDash and Uber Eats as well as continued growth from our Instacart business. You've got the media business that we expect to continue to grow. And importantly, the media sharing opportunities that we have with our new partners and when you put all that together, that allows us to expect that we will make money in e-commerce next year.

And Michael, your third question. I'm not sure I'm qualified to speak for the rate of the grocery industry growth rate for 2026. And I certainly don't want to get into any guidance at this point. We'll do that next quarter. But I don't know that there's any reason why there should be this dramatic slowdown in the grocery industry. And certainly, not for us, we've got new store growth coming -- we're closing kind of unproductive and low-performing stores.

E-commerce has been -- has had a great year and continues to accelerate. It seems like every month more and more -- so the mix might change a bit there because e-commerce will grow faster than physical stores. But we've got a lot going on in fresh categories. Our brands continues to grow faster than the house. And then finally, we want to continue to execute very well in our stores and customer service matters. And I'm not sure that I see a slowdown for 2026.

The next question goes to Jacob Akin Phillips of Melius Research.

So on the last call, you talked about how you're kind of working on how you discuss the Retail Media business with vendors or across the organization. And today, you highlighted some new opportunities with the 3 partnerships. I'm just curious like as more emissions originate on the partner platforms.

How are you structuring the relationship so that you have the right level of first [indiscernible] data? And should we think of the economics as comparable first party res third party for Retail Media?

Jacob, let me take that one. It was a little hard to hear your question, your line is breaking up. But hopefully, I got the gist of it. So -- we're seeing good performance from our Retail Media business today. So in Q3, we saw another quarter of double-digit growth, and we think we've got good plans for Q4 and our plans lead us to believe actually that that business will accelerate into Q4.

And obviously, we'll share more specific guidance as we get into next year. And I think the foundation of this is great tools with best-in-class capabilities for the brands that choose to operate on the platforms. Now as we think about the new partnerships that we've got going forward, the really important thing that was important for us as we structured those relationships is to make sure that we got to participate in the media opportunities that exist and that may originate on their platform rather than our platform.

Obviously, I don't want to get into the details of the specifics of how we structured those agreements but we've structured them in a way that we benefit what I would call appropriately from that in a way that's very favorable to our economics.

The next question go to Seth Sigman of Barclays.

I think there was a comment that you feel good about quarter to date. I'm not sure if that implies trends have improved or not. But is there anything more you can share about that and what may be driving that if it is improving? And you mentioned price investments. I'm just curious, is that playing a role and then a bigger picture question on price investments.

You were doing a lot of testing this year. Is there anything else you can share about what is working versus what is not working?

Yes. I think it's a little early to kind of opine about the fourth quarter. We're just 3 or 4 weeks into the quarter. Just to be clear, I said that quarter-to-date, we are trending ahead of our guidance that we shared with you this morning. In terms of price investments, it's a little hard to know those in real time. We continue to make price investments. We will continue to do that throughout the quarter.

I think what we're seeing with our promotional kind of environment out there is that customers are responding to promotion and we will continue to do that. I don't know, David?

Yes. Just sorry, 1 slide clarification just to make sure the point on Q4 is crystal clear, we're trending quarter-to-date, slightly above the midpoint of our Q4 guidance.

I think there was a second question on there, Seth, about price investments. Listen, we continue to make sure that we offer great value for the consumer. As Ron talked about, a great example was towards the end of the quarter when we knew consumers were struggling given SNAP benefits being withheld, we invested in what we believe was an appropriate way and also a very responsible way with our margins to bring the cost of the Thanksgiving dinner down as well as lower prices through promotions on a number of critical items for households.

And I think -- we'll continue to do that. Value is at the foundation of what we do, and we'll continue to do that in a responsible way.

The next question goes to Simeon Gutman of Morgan Stanley.

Two questions. The first, e-commerce, now that you'll be in the green next year, can you talk about the scalability or maybe incremental margins? Does it move quicker or it's still a long evolution and part 2, since you've been in your role Ron, there's been some significant change, strategic change, tactical change.

Today's call sounded a little more urgent with some pricing folks coming back to work, et cetera. I don't know if that's a fair read or not. Can you say if it is? And I guess new CEO should be very little interruption as far as execution goes because it sounds like the plans are all being built today.

Let me ask David to cover the first and then I'll cover the second.

Yes, let me take the first one. So obviously, the economics are very commerce business with the outcome of the strategic review have changed. So we now move from a business that was in the red to a business that's now in the green. We've had a really good growing business now for many quarters. And I think with the new partnerships that we've signed with the stores that we're building with the strong growth that we're really seeing across all elements of our e-commerce business.

I think what that allows us to do is continue to scale the business in a way that we now make money. So I think as you think about that going forward, I'm not sure we see a dramatic change in the growth rate. but I'd expect us to see continued strong double-digit growth from the e-commerce business going forward with the change being that, that business is now profitable.

And Simon, just to get into the second point, I've been here. I think this is my tenth month. And my only objective is to set up the company for future success. We got to do the right things, and we're going to do the right things even if some of the decisions are hard. And you ask about urgency. I'm not sure there's any more urgency. I'm always urgent about everything. And I think going fast needs to be a key element of our culture. I think being willing to make the tough decisions needs to be a key part of our culture and to the support we've gotten great support. The board has been very supportive of those things that we need to do to set the company up for future success.

And frankly, our management team has really embraced the speed, the decisions, the focus on the customer, the focus on kind of moving some of the influence from our corporate office to our divisions, where our customers are. And then 5 days a week, it's frankly just a function of the fact that that's just retail. I mean we need to be here. We need to collaborate. We need to be able to respond quickly. And we need to be able to support our stores that operate 7 days a week as long as our -- as well as our manufacturing facilities and our distribution facilities.

So I wouldn't say there's more urgency -- but I would say that there's plenty of urgency.

The next question goes to Thomas Palmer of JPMorgan.

In the release discussing the fulfillment center closures, there was the mention right of the $400 million in savings. Could you maybe get a little bit of a breakdown of where these savings will be seen. I think some of it might be depreciation, some of it other operating costs? And then when we're thinking about the reinvestment -- how much of this is investment that you probably would have undertaken anyway, and this just gives you kind of better AO to fund it versus things that might not have occurred if the closures had not occurred?

Yes, let me take that one. So as you think about the $400 million, you're right that, that splits across what I would call kind of kind of operating profit, kind of EBITDA kind of more cash-related items. And then, of course, there's a component of it relates to depreciation. So it is split across both. In terms of investments, the way I would think about that, obviously, and we'll get more into that in terms of when we get into guidance for next year, it's a combination.

Clearly, it gives us fuel to be able to make investments that we were likely already going to make. But it also gives us incremental flexibility to invest in things that perhaps we were not going to be able to make. So we'll get into more details on that as we get into 2026 guidance, but hopefully, that gives you sufficient color.

And just to add, I mean, the key of e-commerce, it's our -- one of our fastest-growing businesses, and that will continue. In fact, it continues to accelerate. It's 11% of our sales. The focus is we got to make money on a business that's growing that fast. And it was all about we're going to get profitable. We got to get profitable fast because that e-commerce is a key part of our future here.

The next question goes to Rupesh Parikh of Oppenheimer.

So just going back, I guess, just to CapEx. So going forward, more aggressive store openings, obviously, a change in our e-commerce strategy, does anything change in terms of how to think about the baseline CapEx spending for the business?

CapEx.

I don't think anything changes in the immediate term about the CapEx. I think what we're doing is prioritizing the mix differently, so we're reallocating more into our storing program and less into other areas of the business. We think this is good for the ROIC of the company and the returns on our capital as we get good returns from major storing programs. So think of it more as a mix shift.

The final question goes to Karen Koski of North Coast Research.

And looking at your store development -- well, let me back up a bit. It sounds like you talked about the mid-tier customer pulling back some more in line with the lower income customers that a change that you saw during the quarter. and looking at store development, anything going on at Fred Meyer that you might want to talk about? And could you perhaps talk about how it's larger exposure to general merchandise as you're thinking about that banner?

Sure. Yes, I can give you some big picture kind of comments about the what we're seeing on the consumer side, as you've been reading, consumer sentiment has declined a lot over the last 4 months. And there's a lot of reasons behind that, whether it's a slowing job market or the government shutdown, the SNAP benefits, concern about inflation and categories like beef and coffee and chocolate, I just think customers are managing their budgets carefully, and they're making more trips.

They're making smaller trips. The idea of stocking up is declining a bit. And we're seeing this economy where high income premium shoppers, they continue to spend while lower income customers are pulling back more aggressively.

In terms of that middle bucket, I would guess, again, they're also looking for value. And the best indicator of that is our Q3 was softer in the later parts of the quarter because of the pause in SNAP benefits. So that would be kind of -- I think going forward, I think the consumer is going to remain cautious. I think there's going to be more focus on food items and less on discretionary categories.

Does that impact Fred Miner? I think it probably does from their mix of higher mix of discretionary and GM merchandise. But it's also -- we're seeing it in adult beverages, snacks, I think the good news is that we're seeing this continued shift from restaurant purchases to food at home purchases, which should be good for our business.

And then I think the other big trend we're seeing is e-commerce continues to grow a lot faster than physical stores. Fred Meyer, I don't want to point out a specific division, but Fred Meyer continues to perform well. We got Todd out there, President, Todd Cammie, running it. And I was out there a few months ago, and I'm feeling pretty good about Fred Meyer.

I think maybe just one thing just to add on stores and store formats as to how we think about that we'll continue to build kind of large stores around the 123,000 square foot. We've also got a 99,000 square foot format that we're going to continue to build. And I think as we think about the future, we're going to continue to experiment to make sure that we have the right array of store formats to cater consumers wherever they may be located.

That concludes today's question and answer. I will now hand back to Ron Sargent, Chairman and Chief Executive Officer for any closing comments.

Okay. Well, thanks, everybody. Thanks. We had a lot of great questions today. Before we conclude our earnings call, we'd like to share a few comments with our associates who are listening in. The progress we've made and the strong results we share today reflect your hard work and your commitment. This year, we focused on running great stores, delivering a strong customer experience and strengthening our core business really priorities that are essential to our success going forward. Your efforts are creating a strong foundation for Kroger's long-term growth.

We're very proud of what we've accomplished so far, and we're excited for the work ahead. So thanks for everything you do and for your hard work during a really busy holiday season. Thanks, everybody, for joining us on the call this morning. We look forward to speaking with all of you again soon. I hope to see you in our stores, and happy holidays, everybody. Thank you

This now concludes today's call. Thank you all for joining, and you may now disconnect your lines.

Good morning, and welcome to the Kroger Co. Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Rob Quast, Vice President, Investor Relations. Please go ahead.

Good morning. Thank you for joining us for Kroger's Second Quarter 2025 Earnings Call. I am joined today by Kroger's Chairman and Chief Executive Officer, Ron Sargent; and Chief Financial Officer, David Kennerley.

Before we begin, I want to remind you that today's discussions will include forward-looking statements. We want to caution you that such statements are predictions, and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger Company assumes no obligation to update that information. After our prepared remarks, we look forward to taking your questions. In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to one question and one follow-up question, if necessary.

I will now turn the call over to Ron.

Thank you, Rob. Good morning, everyone. Thank you for joining our call today. We're happy to report another quarter of strong results, which demonstrates the clear and measurable progress we're making on our key priorities to simplify the organization, to improve the customer experience and to focus on work that creates the most value. Today, I want to talk about what we've accomplished, the proof points we see in our quarterly results and how our priorities are positioning Kroger for sustained long-term growth.

Over the last several months, we've made good progress to position the company for future success. A key part of that success is a strong leadership team. And during the quarter, we continued to upgrade our team. We promoted a tough division president to lead our brands, one of our key growth initiatives. We hired a new Head of Product sourcing who will help us lower our cost of goods sold and close the gap with the industry's best-in-class. We're welcome to new General Counsel, and we continue to elevate strong retail leaders across the company, including several new division presidents.

As we continue to build our leadership team, we're also looking at our costs, especially those expenses that don't directly support our priorities or deliver value to our shareholders. As we shared last quarter, we've begun closing approximately 60 unprofitable stores. Last month, we also reduced our corporate administrative team by nearly 1,000 associates. While these decisions are difficult, they are also necessary for the company's long-term success.

Additionally, in order to create greater focus and simplify our business, we're reviewing all noncore assets to determine their ongoing contribution and role within the company. And finally, we recently put an issue behind us by reaching a legal settlement with C&S Wholesale Grocers. We are pleased to resolve the claims so that we can remain focused on serving our customers and running great stores.

Our efforts to create greater focus are showing up in today's second quarter results. Identical sales without fuel grew 3.4%, which was ahead of our expectations. This is our sixth consecutive quarter of identical sales without fuel improvement. Sales growth was led by pharmacy e-commerce and fresh categories. We know that fresh products are important to our customers, specifically in meat and produce. These categories continue to outpace center store sales and reflect the growing demand for healthier options. Our sales growth in fresh category shows that we're making strong progress in the categories our customers care most about.

Improving grocery volume is also important to us. We're making strategic price investments, which led to another quarter of sequential improvement. In fact, since the beginning of the year, we've lowered prices on more than 3,500 incremental products across our stores which is improving our price spreads against our major competitors. As we lower prices for our customers, we're committed to doing so in a way that keeps our gross margins stable. We're making our promotions simpler and have continued to reduce complex promotional offers. Additionally, we are making it easier for nondigital customers to take advantage of all the value Kroger offers by reintroducing paper coupons in every store.

Our customers are recognizing these changes, and they're giving us credit for them. We know this because customer price perception improved in nearly every division this quarter, and we saw another quarter of sequential improvement in share. Beyond the price of the shelf, families are also looking for quality and value. Our brands products had another strong quarter with sales growth again outpacing national brands. Our brands offer unique products with high quality and represent a point of differentiation for Kroger. Simple Truth and Private Selection brands again led our growth. Looking ahead, we see our brands as a critical strategic asset, helping us grow sales and build loyalty with customers.

E-commerce. E-commerce also continues to be an important and growing part of our business. Sales were strong in the second quarter with 16% growth led by good performance and delivery. We continue to make progress on improving profitability, and we saw improvements in both pickup and delivery profitability on a quarter-over-quarter basis. E-com remains a top priority for us.

Running great stores is also critical to our future and our store teams are delivering on the basics, being in stock, showing clean and uncluttered isles and making shopping easier for our customers. Our internal composite scores, which track key metrics like in-stock levels, fresh product quality and customer service are showing consistent quarter-over-quarter improvement.

And as we are improving our store and e-commerce shopping experiences, we're also taking meaningful steps to reduce our cost structure. In the second quarter, we were pleased with our OG&A rate improvement, and we'll continue to aggressively look for ways to reduce costs throughout the company. We believe that many cost opportunities remain.

So to summarize, we've made strong progress so far this year, and we also know that we have a lot more work to do. Looking ahead, we're focused on investments that will grow our core business. The first of these is new stores. We're on track to deliver 30 major storing projects in 2025, and we are accelerating new store projects with more efficient layouts and faster construction time lines. In 2026, we expect to increase store openings by 30%, helping us grow both in-store and online sales faster.

While we are growing our physical footprint, we're also modernizing our business to operate more efficiently and serve customers better. Artificial intelligence is one of the key tools to help us get there. Accelerating our AI efforts is a natural step for Kroger given our long history of leadership and data and machine learning. Where we've implemented AI in different parts of the organization, we're seeing results with more competitive pricing, shrink improvements and faster fulfillment, which enables 2-hour pickup for customers.

These are just a few examples of what AI is doing to help us better serve our customers with more and bigger opportunities ahead to both support our associates and improve the customer experience. E-commerce will also continue to have a meaningful and growing impact on our financial results, which is why we announced a thorough strategic review last quarter.

We are progressing with 2 key objectives in mind. First, we will improve the customer experience by using our stores to deliver groceries faster. Stores are our most important asset, and when we use our stores to fulfill online orders, the inventory is closer to customers and the last mile delivery costs are lower. As demand for convenience grows, we can leverage our store footprint to reach new customer segments and expand rapid delivery capabilities without significant capital investments, which leads to our second objective, improving profitability and reducing our cost to serve.

We're examining all aspects of our business to drive greater efficiency, including a full site-by-site analysis of our Kroger automated fulfillment network. Where we have seen strong demand in high-density areas, these facilities deliver better results than those facilities where density is lower and customer adoption has been slower. We continue to evaluate all options across all facilities to improve profitability while continuing to provide a great customer experience. We expect to share an update on our strategic review during the third quarter. We're confident that the outcome of our work will lead to both stronger e-com capabilities and a clear path toward profitability.

Finally, we're starting the foundational work to refresh our go-to-market strategy. This involves a deep dive into customer data and a rigorous assessment of our competitive positioning. This important work will set us up for even stronger performance in the future.

Now I'll turn it over to David, who will review our financial results in more detail. David?

Thank you, Ron, and good morning, everyone. This quarter, Kroger delivered strong results, which reflect continued progress in our core grocery business and robust growth in e-commerce and pharmacy. Momentum in our core grocery business is being driven by improved execution as well as a disciplined approach to price investments. By reducing the complexity of our promotions and investing more in everyday prices, we are sharpening our price perception with customers driving volume improvements while responsibly managing our margins.

I'll now walk through our financial results for the second quarter. We achieved identical sales without fuel growth of 3.4%. Our sales growth was led by strong pharmacy, e-commerce and fresh results. We are encouraged by the continued improvement in grocery volumes, particularly in the perimeter of the store. Food inflation was slightly lower in the second quarter compared to the first quarter but continues to trend in line with our original expectations from the beginning of the year.

Our pharmacy business delivered another strong quarter, driven by core pharmacy scripts and growth in GLP-1s. Although strong growth in pharmacy sales impacts our margin rate, it drives positive gross profit dollar growth and improves our overall operating profit. This quarter, we've been pleased to welcome more ESI customers back into our stores. We continue to expect that the full return of the business will take time and in Q2, ESI had a roughly 15 basis point positive impact on our ID sales.

We continue to keep a close watch on the changing tariff environment. As a domestic food retailer, we expect a smaller impact than some of our competitors. We continue to be proactive to address exposure where we do have it, and our approach remains to raise prices as a last resort to ensure that we keep prices as low as possible for our customers. Tariffs have not had a material impact on our business thus far and as of now, do not expect them to going forward.

Our FIFO gross margin rate, excluding rent, depreciation and amortization, fuel and adjustment items, increased 39 basis points in the second quarter compared to the same period last year. The improvement in rate was primarily attributable to the sale of Kroger Specialty Pharmacy, lower supply chain costs and lower shrink partially offset by the mix effect from growth in pharmacy sales, which has lower margins and price investments.

After excluding the effect from the sale of Kroger Specialty Pharmacy, our FIFO gross margin rate decreased 9 basis points, largely in line with our expectations to remain margin neutral. The slight reduction in our FIFO gross margin rate was primarily due to pharmacy mix with good progress on rate in the rest of the business. We have many levers to improve our gross margin rate over time and we will continue to use those to balance incremental price investments that improve our value perception with customers. We expect our gross margin rate for the full year on an underlying basis to be relatively flat as we balance the impact of pharmacy mix, margin enhancement initiatives and price investments.

The operating, general and administrative rate, excluding fuel and adjustment items, decreased 5 basis points in the second quarter compared to the same period last year. The decrease in rate was primarily attributable to improved productivity and a favorable comparison to prior year, which included certain nonrecurring charges, partially offset by the sale of Kroger Specialty Pharmacy. After adjusting for the effect from the sale of Kroger Specialty Pharmacy, our adjusted OG&A rate significantly improved, decreasing 41 basis points on an underlying basis.

Cost optimization is one of our top priorities and driving productivity has long been a core competency of this company. We will continue to build on that strong track record by identifying new and innovative ways to deliver cost savings across our business, and our teams are actively pursuing opportunities across multiple areas. One of the areas we're prioritizing is sourcing.

We see significant opportunities to optimize our costs across both cost of goods sold and goods not for resale. We also have a significant and continuing opportunity to modernize work across the enterprise, making us more agile and efficient and leading to a more streamlined operating model going forward.

Our adjusted FIFO operating profit in the quarter was $1.1 billion. Adjusted EPS was $1.04, reflecting 12% growth compared to last year and our strongest growth rate since the fourth quarter of 2023. Fuel is an important part of Kroger's strategy and offers an additional way to build loyalty with customers through the fuel rewards in our Kroger Plus program. Fuel sales were lower this quarter compared to last year, attributable to a decrease in the average retail price per gallon, and fewer gallons sold.

Fuel profitability was also behind the same period last year, and we expect gallons sold to remain lower on a year-over-year basis for the remainder of 2025.

Our e-commerce business delivered 16% growth this quarter, driven by an increase in both household and order frequency. This growth was led by delivery with orders fulfilled from both our stores and centralized fulfillment centers. We are seeing a clear trend of customers opting for faster delivery times, an area where we are well positioned based on our conveniently located store network, coupled with our delivery partner, Instacart. Today, we can offer delivery in under 2 hours from 97% of our stores. This capability is resonating with our customers, and we continue to see more orders placed in these short windows. This digital momentum directly fuels our Retail Media business, which had a strong quarter and is a key contributor to profitability.

While we're encouraged by the performance in the quarter, we believe we have an opportunity to meaningfully accelerate our growth. To support this, we're actively reviewing the operating model and how we engage with retail media clients to ensure we are strategically positioned to maximize growth in this area of our business.

I'd like to take a moment to provide a brief update on associate and labor relations. We made significant progress on agreements this quarter, which provides certainty for our associates and our business. In total, we ratified new labor agreements covering approximately 54,000 associates. We continue to meaningfully improve wages and benefits, and we value our strong working relationships with our unions. By working together, we're better able to support associates and improve the experience we provide customers. These collective efforts have helped us build a more stable workforce with improved retention rates, which in turn drives a better customer experience.

I'd now like to turn to capital allocation and financial strategy. Kroger delivered strong adjusted free cash flow this quarter, which reflects the strength of our operating performance. Free cash flow is important to our model, providing liquidity for our operations and strengthening our balance sheet. At quarter end, our net total debt to adjusted EBITDA ratio was 1.63, which is below our target ratio range of 2.3 to 2.5. This provides us with significant financial flexibility to pursue growth investments and other opportunities to enhance shareholder value. We expect to return to our target leverage ratio over time.

Our capital allocation priorities remain consistent and are designed to deliver total shareholder return of 8% to 11% over time. We are focused on investing in projects that will maximize return on invested capital over time while remaining committed to maintaining our current investment-grade rating, growing our dividend, subject to Board approval and returning excess capital to shareholders.

In the second quarter, we raised our quarterly dividend by 9%, reflecting the strength of our free cash flow and our commitment to returning capital to shareholders. Our quarterly dividend has grown at a compounded annual growth rate of 13% since its reinstatement in 2006, and this marked the 19th consecutive year of dividend increases. Dividend increases are just one component of our broader total shareholder return strategy, and we plan to continue returning capital to shareholders through share repurchases.

We expect our $5 billion ESI program to be completed in the third fiscal quarter of 2025. The ESI is being completed under Kroger's $7.5 billion share repurchase authorization. After completion of the ESI program, we expect to resume open market share repurchases under the remaining $2.5 billion authorization. We expect to complete these open market share repurchases by the end of the fiscal year, which is contemplated in full year guidance.

A key priority for Kroger is to improve ROIC, which includes reallocating capital towards higher return projects such as new storing. We are pleased with the progress we are making on these projects and are on track to complete 30 this year. As Ron mentioned earlier, we plan to accelerate these storing projects beyond 2025 and expect them to be an increasing contributor to our growth with a 30% increase expected in 2026, positioning us for sustained expansion and market share growth.

I would now like to provide some additional detail on our outlook for the rest of the year. We are pleased with our second quarter results, which reflect continued momentum in our business. Sales have been strong, led by e-commerce, pharmacy and fresh, and we are encouraged by the improvement in grocery volumes. As a result, we are raising our identical sales without fuel guidance to a new range of 2.7% to 3.4%. For Q3, we expect identical sales without fuel to be slightly below the midpoint of our full year range. We are also raising the lower end of our adjusted FIFO net operating profit and net earnings per diluted share guidance to new ranges of $4.8 billion to $4.9 billion and $4.70 to $4.80, respectively.

I will now turn the call back to Ron.

Thanks, David. The team continues to make progress in running great stores. We are more focused on our core business and our customers. We're moving with speed, and we're simplifying the company. We are executing better in our stores, and we are seeing it in the results both our quarterly financial results and our customer metrics. Our customers are telling us they like lower prices and simpler promotions. They care about quality and value, and they appreciate better store conditions and better service. Our work is far from finished, but I'm proud of the team and the progress they're making.

Before we move into Q&A, I'd like to comment briefly on the CEO search. There is no specific news to share at this time but the Board remains actively engaged in the process. We'll now open it up for questions.

[Operator Instructions] Our first question for today comes from Leah Jordan of Goldman Sachs.

I mean the biggest call out for me that was new is it seems like you plan to use your stores a bit more for e-commerce fulfillment. Can you help us understand how you plan to implement that? Any color on timing and cost how much capacity do you have in your stores today? And then will you have to rework at the back of the stores? And how are you thinking about labor? And I guess, ultimately, how does this balance with your CFC network today as well?

Sure. Let me start with that. I mean we're using our stores very heavily now to fulfill e-commerce orders every day. So it's really not much of a change in that regard. We are taking a hard look at some of our automated facilities. But we had a very strong quarter in both e-commerce sales as well as profitability. And significantly, this quarter was the first time that the delivery sales passed store pickup sales. So I think that indicates that delivery is really important to our customers.

In terms of the strategic review, we're nearly complete. We plan to update you in the third quarter. And to be clear, we feel like e-commerce is incredibly important to our customers. It's also important to our business. We understand that the path to profitability is also equally important. But in terms of reworking stores, there's not much that we need to do. I mean we're doing it now. We're delivering the bulk of our e-commerce is done by stores today, and we adjust volumes all the time. I think new store openings will help us as well. But really not a lot of work. We think it's kind of an asset-light delivery possibility, and it also allows us to get deliveries to customers within a couple of hours time and if they want to pay for it, even earlier than that.

That's very helpful. And then I wanted to switch and ask about price investments. You called out lower prices on, I think, 3,500 products, and that's a step-up from 2,000, I think you said last quarter. And I know you've changed in how you're presenting some of these promotions to be [indiscernible] as well. But just has anything changed in the competitive environment? How do you view your [indiscernible] today? Is that 3,500 the end of the line? And are you still [indiscernible] make these investments in a margin-neutral way at this point?

Yes. Let me answer that one. The competitive backdrop on pricing remains very rational out there. Our priorities currently are to really simplify our pricing strategy. We do want to lower prices. We have done that with the 3,500. We'll continue to do that. Any cost increases, we've tried to absorb them as much as possible. Occasionally, the tariffs will have an impact on some of our pricing.

But pricing in general is very rational. We're going to continue to do it, and we are reducing our spreads versus our competition. We did that in Q2, and I think we'll continue to do that in Q3. But when you look at pricing, we're a different model than some of our competitors, but when you look at promotional pricing we're very, very competitive with everybody out there.

Leah, it's David. Just one more thing to add just on the margins. Obviously, doing this in a responsible way is an important priority for us. we feel we were able to do that in Q2, balancing investments we want to make with a range of cost-saving initiatives, and I'd expect us to be able to continue to do that through the balance of the year.

Our next question comes from Rupesh Parikh of Oppenheimer.

So just going back to your ID sales [indiscernible], now 2 consecutive quarters above 3%. How does your team feel about sustaining close to that level of momentum going forward?

Rupesh, it's David. Let me take that one. I mean we're very happy with the ID sales performance that we've seen so far this year. Good growth from multiple different areas of the business. Obviously, we've updated the guidance range, which obviously we feel confident about our ability to deliver that. I think maybe just the one thing that is important to know is, the first half of the year was definitely our easiest from a year-over-year comparison perspective. So as we get into the back half of the year, the comparisons do get a little harder, that's reflected, obviously, in the guidance. And if you look at the 2-year stacks on our ID sales for the balance of the year, we expect to deliver very healthy and continuing to improve [indiscernible].

Rupesh, the only thing I would add is that I think our customers are responding to simpler promotions, lower prices, better service, cleaner, less cluttered stores. And to also give credit where its due, our merchants and marketing team are offering promotions that customers are responding to. And the divisions and the store associates are executing very well. So we're trying to make less busy work and more customer work.

Great. And then maybe my one follow-up question, just on Retail Media. The comment here appears more positive retail needed this quarter versus recent quarters. So is my understanding correct? And what do you think is driving that improved performance?

Yes. Rupesh, I'd come back to the fact that we've just got a really good offering. I mean we really like the offering that we've got here. We really think it gives the clients that use our retail media assets, the ability to do things that others cannot do. And I think customers are responding to that. So we feel good about the growth that we're seeing. It is a little bit more positive. We did see a slight acceleration in that business this quarter relative to last quarter. We still think this is a very meaningful opportunity for us. We are tweaking some things in the way that we talk to clients about this, which gives us confidence that this can be a continued growth driver for us both in the balance of the year and also into next.

Our next question comes from Simeon Gutman of Morgan Stanley.

So if you take the first to second quarter comp, so it got a little bit better sequentially. And [indiscernible] the slide deck said that the -- there was some sequential improvement in volume. I think it still implies that maybe volume is not positive, but it improved quarter-to-quarter. Can you explain which one moved more? Was it ticket growth or volume growth sequentially? Or was it about the same to get to the 34?

Here's the way I'd try and explain that one. So I think a couple of things. So we saw the kind of inflation number quarter-on-quarter was actually slightly more moderate in the second quarter than we've seen in the first and our units improved. So I think it's pretty balanced, but it was more of a unit improvement than it was an inflation improvement.

And just to kind of add a little color commentary there. Grocery units have certainly improved for the last several quarters. And at this point, we are almost flat year-over-year.

Got it. Okay. And related to that, and then I'll put the follow-up, it sounds like in the back half, even though inflation does look like it's picking up a little bit. It's a comparison, which I think you -- they're tougher by about 100 basis points, why the back half doesn't get even stronger? So that's the follow-up to that question.

The other question, Ron, I wanted to ask. The -- not the e-commerce strategic review, but it sounds like there's a lot of evaluation of everything in the business going on. I wanted to ask about the value proposition. And if there is a debate around the pricing architecture and whether there is a debate around even moving to like a strict EDLP pricing architecture?

Yes. There's no debate about moving to an EDLP pricing architecture. I mean, Kroger is a retailer that for many, many years, has been a promotional retailer. Our customers respond to that. Our customers come to us for that. So I don't think there's going to be a dramatic change. On the other hand, you look at white shelf or white tag shelf prices and you want to narrow that spread on the everyday price items. So I don't think there's a fundamental shift in our pricing strategy, but we're going to be sharper and we're going to be more focused, and we're going to be simpler.

Yes. Let me -- and then let me just, Simeon, come back to the question on ID sales through the balance of the year. Listen, you rightly point out that we cycle stronger results in the second half of the year. I mean, that is a big factor and definitely an important one as we reflected on both our plans for the balance of the year and, of course, where we set the guidance. We feel comfortable about where we've set the range and our priority remains, as we've said, is improving grocery volumes whilst being responsible in the price investments that we're making, managing margins. And that's the delicate balancing act where we've got to continue through the balance of the year.

Our next question comes from Michael Lasser of UBS.

With each passing day, it does seem like you have more and more players across the industry who are looking to the core grocery sector to grab either wallet here or drive other elements of their business and use that as a funding mechanism to harvest other portions of the profit pool across retail, which could put downward pressure on the profit pool within the grocery sector. It seems like your message, Ron, here is listening, we still have a lot of room for internal improvement in repositioning our assets. How much further can you drive improvement from these actions while maintaining a margin rate that's been around 3.1% for the last few years?

Michael, I think the short answer is much further. I mean we've got lots of opportunities to improve our margin rate. I mean I can go through kind of a long list of those, if you would like. But certainly, we've got opportunities on pricing. We've got opportunities on our brands, e-commerce, certainly, sourcing is a big opportunity that we're working really hard on.

I get what you're saying about competitors, but the food industry, it's always competitive in terms of the pricing environment out there. I think our competition continues to be very, very rational. All retailers are dealing with kind of similar issues. And our focus is simplifying and focusing on the things that matter most to our customers.

I don't know, David, do you want to [ add a comment here? ]

Yes, maybe just to reinforce the point about the cost opportunity that we think we have. Michael, we think -- Ron has already mentioned sourcing. I think we believe that we've got a very significant opportunity on cost of goods sold as well as on goods not for resale. We've made some people reorganizations in that area to help us really get after it. We think there's continued opportunity in our OG&A.

And we also think what I would -- there is kind of big opportunities around what I would call sort of modernizing the operating model. So I think as we think about what is undeniably a very competitive environment, what we're very, very focused on is finding the fuel to help us manage that and invest back into the business. And I think we feel that we've got quite a long runway on that across the coming months and years.

Understood. My follow-up question is, can you unpack the back half guidance a little bit more. You raised the ID outlook, you lowered your tax rate. You took up the low end of both your operating profit outlook and as well as your EPS outlook. So what changes from a margin or below the line perspective have you made to help us frame how we should be thinking about the second half of the year?

Yes. So Listen, I think on IDs, we've already talked about. I think we've got much tougher comparisons as we get into the back half of the year, improving grocery volumes. So I think we feel good about where we've set the range on that. I think if I understand your question, it's more around the sort of profit puts and takes.

So I think a few things that we've got going on that. Number one, listen, it's undeniable. We still have a consumer environment that is still pretty uncertain. And whilst we have not yet seen what I would call sort of consumer sentiment translate necessarily into action, that remains an area that we continue to watch very, very carefully.

I think the second thing is that our pharmacy business, we expect it to continue to grow ahead of the rates of the rest of the business. And whilst that will give us dollars, it does create pressure on mix.

The third thing is really around fuel headwinds. We expect that, obviously, it's not in our IDs, but it is in our profit number. We expect that to create a headwind for us the balance of the year as it has done so far year-to-date. We're working very hard, as we said, to offset all of those things with as much sort of cost and efficiency initiatives as we can.

The tax rate you called out, it's very, very marginal. We had a couple of things really kind of move around mainly on state taxes. And candidly, it's -- we're talking decimal points that move that. And so that was the reason that we felt confident enough to kind of raise the floor on the profit guidance but did not change the top end despite the improved ID sales.

Our next question comes from Seth Sigman of Barclays.

I wanted to ask about e-commerce and follow-up there. The growth that continues to accelerate, is there a way to think about the incrementality of what you're seeing there, thinking about new customers versus existing customers? Because you're also obviously seeing non e-commerce is improve as well? And then I guess a related question is just thinking about the shorter delivery windows. What are you seeing -- what is the consumer looking for as they look for that quicker delivery?

Yes. I'll start, David, feel free to add in. But consumer is looking for kind of the things they look for when they shop our stores, but more. I mean they want product to be fresh. They want it to be price right. They want the orders complete and they wanted to delivered fast. I think a few years ago, we might have said next-day delivery on food items works just fine. I think today, the customer is looking for speed and they're willing to pay for it. So I think we've tried to adjust kind of how we do business to how the consumer wants us to do business.

I'm not sure if I can really say much more. But I think more and more people are willing to pay for incredibly fast service within 2 hours.

Yes. Maybe let me take the sort of comment around incrementality. I think a couple of things here. So number one, we're adding new households. I mean that's really, really important because those new households and new households to Kroger. And we're also growing order volumes with consumers that are already shopping with us. And one of the things that our data tells us, and I think this is why it is really, really important is, if people enter our ecosystem through e-commerce, they then shop the entire ecosystem and they become more valuable customers to us overall. So I think that gives us a good sense of there is incrementality there. Of course, you get some switching. Some people will drop out of a store and order online, but people are generally shopping multiple different ways through the Kroger ecosystem.

Okay. That's helpful. And then I wanted to follow up on the pharmacy performance in the quarter. To what extent do you think the script share gains are translating into improvements in other parts of the business, obviously, with ID is accelerating. And then how are you thinking about vaccines for the second half of the year just given there has been a lot of noise there.

Yes. So let me take that one. Listen, on vaccines, listen, I think, obviously, there's some sort of delays in the approvals. I think we'll see that normalize as we get through the sort of later into the year. So I think it's just a delay more than anything. So we expect that to pick up. [indiscernible] come back to the sort of ecosystem comment, which is that when people shop in pharmacy, when they're in the store, it does provide incrementality to the rest of the business. We don't disclose that metric, but we feel great about when somebody walks in and fulfills that prescription or whether they're doing a regular shopping trip. We've given them the option to do those things within a Kroger store or online.

Our next question comes from Paul Lejuez of Citi Group.

Curious if you could talk about performance by different income segments where you're seeing stronger versus weaker results? Also if there are any call outs regionally? And then I just want to go back to the inflation versus unit discussion. If you could share what your assumptions are for the second half and if you do expect units to turn positive at some point?

Okay. Let me kind of walk through several of those here. First of all, we're seeing overall retail food spend has been very stable. I think customers probably cutting back in other areas, but spending on retail food has been kind of flattish. I think the cutting back is probably on discretionary visits, our discretionary purchases and restaurant visits. But I think at the same time, customers are feeling pretty stressed about the economy. They're doing things to save money.

And when you look at income cohorts, low and middle-income households are really looking for deals. They're using coupons more. They're making smaller but more frequent trips and they're buying more private label products. They're also eating out less.

When you look at the higher income households, while they're also concerned about the economy and food prices, they're still spending. And they're splurging on some of the premium products. When you look at the growth in our brands, Private Selection and Simple Truth, where premium products are leading the way. They also are buying larger pack sizes. I think they're also interested in value for serving.

So in both groups, we're seeing less of the maybe discretionary spending. We're seeing some declines in snack categories, adult beverages. So looking ahead, I think we think that the consumer is going to remain cautious. Consumer sentiment continues to be low historically and customers continue to be sensitive about food pricing.

And I think in terms of regional basis, I don't know that there's really been a lot of differences across Kroger in terms of regional differences in that pattern. I think it's kind of a bit of a tale of 2 cities. And in terms of inflation, our internal assumption is 1.5% to 2.5%. And as David said, we were lower than the midpoint, I think, this past quarter. We don't expect it to be beyond our range.

Our next question comes from Thomas Palmer of JPMorgan.

Maybe to start out, I just wanted to follow up on Leah's question on price investments. You did note FIFO gross margin, excluding fuel and specialty pharma was down around 9 basis points year-over-year in the quarter. How are you thinking about the trajectory of FIFO gross margin ex fuel as we look toward the second half of the year?

Yes. Let me take that one. What we've said is we're expecting for the full year that number to be relatively flat. So that should give you sufficient to be able to work out the assumption for the balance of the year. And I think, listen, what we're trying to do with that is -- and as I said, I think we've done a good job of that through the first half is balance, obviously, wanting to offer great prices to our consumers with obviously a whole range of multiple different margin initiatives that we've got going on.

The important thing, I think, just to note, is that if you look at the second quarter and strip out kind of pharmacy, the impact from pharmacy mix, our gross margins on the core business, were really pretty healthy, and we feel good about where they are.

I know there's not yet a significant update on the CEO search. But I did want to ask on this. I mean, one, any, I guess, traits that you're looking for in a CEO? And then second, there seem to be a lot of different initiatives already under review absent a permanent CEO. Are there areas that you're holding off on reviewing or making decisions on until the seat is filled?

Short answer to that is no. We're moving forward aggressively in virtually all areas of the business to position the company for success over the long term. In terms of what -- and I don't want to speak to the search committee, but there's probably no surprises here. You're looking for critical experiences in people's backgrounds. I think you're looking for competencies in terms of expertise of things they've done. You're looking at personal attributes around leadership and style and people skills. So there's really no surprise there.

But it's a unique company and the scale is large. And that's why I think that they're being very careful and very cautious. But I remain confident they're going to find an outstanding leader for Kroger. In the meantime, I'm trying to help our talented team in any way I can. But no, we're going full speed ahead in virtually every area of the business to kind of position us for longer-term success?

Our next question comes from Ed Kelly of Wells Fargo.

Nice quarter. I guess first thing, [indiscernible] higher than expected -- I mean, I think, higher than expected this quarter, given what you accrued in Q1. If you extrapolate that for the full year, it's like $0.10 a share or so. I mean, how should we be thinking about LIFO as it relates to the back half of the year here?

Yes. So we -- let me take that one. So as we have -- whilst inflation is kind of in the guidance range that we expected, it's probably more towards the midpoint of that range. And so as a result, what we did in the second quarter is we made sure that we kind of reset the accruals on LIFO on a year-to-date basis. So what you've got in there is 2 things. You've got to catch up from what we assumed in Q1 into Q2. And then you've got, therefore, the assumption of what I would say inflation, broadly kind of where we're running extrapolated for the balance of the year, and that's why the LIFO charge went up.

So I don't think that LIFO charge is reflective that incremental charge, you'd expect to see that through the balance of the year. You'd split that in 2 between catch-up and then ongoing.

Okay. And then my second question is around the free cash flow guidance, which you didn't take up today even though you have $100 million in EBIT. I mean, maybe slightly higher LIFO, I guess. But then the other thing is maybe some benefit from the Big Beautiful Bill. So why isn't the free cash flow guidance higher? What's the offsets within that?

Yes. I mean I'd come back to sort of some of the things I've already spoken about. I mean, obviously, we didn't raise the EPS guidance, consumer environment remaining uncertain, pharmacy mix, et cetera. And then as we have already said, we're looking to make smart investments back into the business that deliver long-term value from an ROIC perspective. And so we're balancing all of those things and didn't felt therefore prudent to touch the cash flow guidance at this time.

Our next question comes from Julio Marquez of Guggenheim. .

It's John Heinbockel. Ron, maybe first question. I know sourcing, you guys see as a big opportunity. How do you think about sizing that? Is that billions of dollars over time? And then what do you need to do differently? And I know you brought somebody in from the outside do differently than you've been doing to capture that? And how quickly does that occur?

Yes. We think sourcing is a big opportunity, not only the COGS sourcing but also the indirect sourcing. We -- you did reference somebody coming in that was [indiscernible], background PetSmart and Walmart and kind of a long, deep sourcing background in his history. We think the opportunity is big. I don't know that we've sized it in a way that we can share with you or the timing of that. But we do feel like we are benchmarking against other competitors, and we are trying to see if there's a bigger opportunity here than we have realized so far.

I think part of that is simplifying. I've talked to a lot of our CPG partners over the last 6 months. And I think our CPG partners would say we need to reduce the cost to serve you guys, and we need to have simpler promotions with you guys. And I think we're working on both of those. And CPG support has been really terrific the last several months. So I'm not sure I want to commit to how much and when, and I'm not even sure I should at this point, but we do think it's an enormous opportunity that we have yet to realize.

And then the follow-up would be -- right -- you think about speed of delivery, you talked about the 2 hours, what can you do inside the store to speed that up further, right, to where you could get to half that time? Is it how you pick the orders? I think we've talked about this, do you pick by quadrant? And remind us, electronic shelf labels, do you -- I don't know how broadly you've utilized those, is that an opportunity to speed the picking process?

Yes. I think there's a lot of things we're doing to speed things up, and we can get you your order even less than 2 hours but there are probably going to be a different delivery fee associated with doing that. So it's not a -- but most customers are very pleased and very happy with our delivery. I think you're right, technology is a big part of the answer. And whether that's AI, which we're already using to pick multiple orders at the same time. Electronic shelf tags, we are rolling out across the company. I'm not sure what percentage of our stores, we have those in yet, but that is also another kind of improvement in speed.

In some stores, depending on the delivery volume, you may have special picking areas. So we're looking at that as well. So there's a lot to be done, I think, in-store picking. And I think as part of our strategy refresh on e-commerce, we'll be sharing not only what's going on inside the store, but also the last mile delivery because I think we've got some good news to share there as well.

Our next question comes from Robert Ohmes of Bank of America.

I was hoping you guys -- could you guys talk a little more and maybe it's not that significant as it could be, but just the nondigital customers and the shift back to paper coupons and how significant can that be? Is that a new incremental driver or a significant tailwind?

Well, I think it's certainly going to help. I mean when you think about the customers in our stores, and believe me, I've talked to hundreds and hundreds over the last 6 months in virtually every division where we operate. And what you heard over and over again is that older customers are not as digitally proficient as maybe younger customers and older customers are feeling like they're -- they want the same deals that the person with the smartphone is getting. And so we wanted to make them on an equal playing field. And I think the end result we'll get incremental business from that.

I think the other customer group that we weren't responding to very well were people who don't have a $600 iPhone and those people also were a little bit of disenfranchised with our digital coupons. So we're really trying to appeal to a broader customer segment, not only people that are very digitally savvy, but also people who are not able to be.

And does it -- is it pulling a lot of new customers? And I also wanted to ask on the fuel being down, is there any changes in the fuel rewards program on the digital side or anything going on there?

Well, let me take the first piece around that. I mean the way that we're looking at that these paper coupons is it generating lift, and I think it is. So we're seeing unit lift from this, and it's part of the overall equation that we look to balance to make sure that we're offering great prices to customers. I think the other important thing to add to Ron's point is, this is something that we measure. So we're measuring customer feedback on this, and we're getting good feedback from customers which I think is an important part of our retention strategy and recruitment strategy as we look to give great offers to our consumer. No immediate plans to change the fuel rewards within our Kroger Plus card offerings.

Our next question comes from Jacob [indiscernible] Philips of Melius Research.

I did want to say that my mom appreciates the paper coupons, in case you want the anecdote. But I wanted to ask about pharmacy. So there's obviously a lot of share to gain from like closures. And then I think on -- you said that it's incremental when they start shopping in the store, but also on the flip side, I think like a good percent of your current customers don't even realize that the stores have pharmacy. So can you talk a little bit about what you're doing to kind of like close the gap both ways to get people to shop the store more [indiscernible]?

Yes. It's a great point. First of all, thank your mother, for shopping at Kroger. We always appreciate that. In terms of pharmacy, you're right. A lot of our customers don't have an awareness that we even have a pharmacy, and we think that's a big opportunity. And I think what we're going to be doing going forward is one, positioning it better in the store, but also trying to tie it into a whole HBC strategy because HBC health and beauty products are a growing category. We think that we've kind of buried that in the store as well.

So I think it's probably a merchandising shift to kind of tie in pharmacy, which has operated kind of separately in the past to tie it in with the rest of the store in a way that HBC becomes kind of a shop of its own, much like the meat department or the deli bakery, et cetera, et cetera.

I don't know, David, anything you want to add?

No, nothing to add. I mean, I think it's an important part of the business. We've got a very big opportunity tying that into the kind of overall progress ecosystem through loyalty is a big opportunity for us.

Yes. Our pharmacy team is doing a really nice job. And we think there's a big opportunity in pharmacy given the [indiscernible] closures and the new ownership structure at some of our competitors, we think there's going to be an opportunity to continue to grow pharmacy better than ours.

Great. And then so you mentioned AI as like a key modernization tool. Do you have anything like concrete examples of where it's driving measurable improvement or where you expect to see improvement going forward? And then I guess more generally, just like how -- what's the strategy for rolling out different tools or use cases?

Yes. Let me take that one. I think the way that we think about AI is it's really the natural kind of evolution of many things that we've been doing for quite some time. So obviously, we've got a couple of decades worth of unbelievable data from our loyalty program, which is an enormous data asset, which obviously is a terrific foundation for us to have. And we've also actually got a deep bench of data science capability and other capability primarily in a 8451 division.

If I think about things that we've done so far, we've got a couple of good examples. I'm really just going to highlight one. We've deployed an AI tool specifically against shrink which is an area that we've been performing well in. We can see the direct result of the AI tool that allows us to see much better inventory levels, sell-through on a by store level. And we're actually now kind of trying to transition that less or sort of away from just being a shrink tool actually into an opportunity for us to accelerate the top line as well by identifying sales opportunities, primarily on seasonal items more efficiently. So I think we've got some good proof points, and that's a really good one.

As I think about what we do next on this, and we've got lots of things that we are experimenting with I think, one, it's an opportunity for us to deepen customer engagement, so using it as a sales acceleration tool, and we see plenty of opportunity there. But I think there are some obviously more obvious ones around what I would call sort of operational excellence and efficiency that we have a lot of opportunity to go after and sort of links to my comments around sort of modernizing the way we work and the operating model.

And just throw out a couple of other examples that's going to be really important and already is in scheduling by department by hour of the day. [ Planogramming ] is going to be very helpful to us in terms of using AI. And then finally, the whole customer personalization is going to be utilizing a lot of AI tools as well.

Our final question for today comes from Michael Montani of Evercore ISI.

Just wanted to ask, first off, if there's any way to kind of conceptualize the potential profit impact from the strategic review. I know we've been thinking several hundred million potentially. But secondly, would that be included in the guide? Or is that external to that?

You're talking about e-commerce specifically?

Yes, e-com.

Yes. I think what we will do is kind of talk in kind of general terms about our path to profitability and with the time line associated with that. But in terms of the amount, I think it's probably not a number we would disclose nor are we ready to disclose it in any case because we're still doing the review as we speak.

Yes. And to be clear, it is not included in the guide.

Thank you. At this time, I will now hand back to Ron Sargent for any further remarks.

Well, thank you all for your questions. We really appreciate them, particularly the comment from Jacob's mother. As you know, before we conclude our earnings call, we'd like to share a few comments with any of our associates who are listening in. I'd like to thank our associates with a strong improvement that we saw in customer equity scores.

As I shared, our customers are seeing how we're improving store conditions, how we're improving freshness and how our team is improving the shopping experience. Setting priorities and developing strategies is really only half the battle. I think the hard part is executing the business, and that's the challenge, and our teams are doing a really terrific job.

So thanks, everybody, for joining us on the call this morning. We look forward to speaking with all of you again soon, and we hope to see you in our stores.

Thank you all for joining today's call. You may now disconnect your lines.

Good morning, and welcome to The Kroger Co. First Quarter 2025 Earnings Conference Call [Operator Instructions] Please note, this event is being recorded. I'd now like to turn the conference over to Rob Quast, Vice President, Investor Relations. Please go ahead.

Good morning. Thank you for joining us for Kroger's First Quarter 2025 Earnings Call. I am joined today by Kroger's Chairman and Chief Executive Officer, Ron Sargent; and Chief Financial Officer, David Kennerley.

Before we begin, I want to remind you that today's discussions will include forward-looking statements. We want to caution you that such statements are predictions, and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings.

The Kroger Company assumes no obligation to update that information. After our prepared remarks, we look forward to taking your questions. [Operator Instructions] I will now turn the call over to Ron.

Thank you, Rob. Good morning, everyone. Thank you for joining our call today. Before jumping into the results, I wanted to share a few thoughts since I last spoke to you in March. After nearly 4 months as CEO, I've been very impressed with the many talented associates I've met across the company. Kroger has a strong bench of experienced operators and dedicated associates who can move our company forward. After spending my career in retail, one thing is clear, retail always starts with the customer. It's pretty simple. Our strategies, our focus on our resources should be dedicated to how we can make the biggest impact on serving our customers.

Grounded in these principles, my priorities in this role are to position Kroger for long-term growth, accelerate top line sales and run great stores. We can do this by better focusing on our core business and by creating a growth culture in the company. Kroger has a long runway with many opportunities ahead and I'm grateful to be part of the team as we transition to our next phase of growth.

In the past few months, we've made a number of changes to move faster and put increased focus on our customer. We're directing investments toward projects that will grow our core business, including plans to accelerate new store openings. We are reassessing our capital allocation strategy to make sure we are spending our capital on projects that offer the highest returns. We are reviewing our noncore assets. We're aggressively looking for ways to reduce costs throughout the company, and we expect to reinvest those cost savings directly into lower prices and additional store hours for our associates so that they can better serve customers.

Finally, we have restructured our leadership team to ensure we have the right talent in place. We created a new e-commerce business unit, aligning all areas of the online customer experience under Yael Cosset, our Chief Digital Officer. We continue to elevate great leaders across the company by appointing Joe Kelley, as our Senior Vice President of Retail Divisions as well as new division presidents in King Soopers, Food 4 Less and Texas where we consolidated 2 divisions just last week. These changes put talented executives in roles where they can support our stores and improve the customer experience.

We are making meaningful changes to the business to create a culture that benefits our customers and our associates, while improving long-term shareholder value. In the first quarter, we are beginning to see the benefits of many of these changes. This morning, we announced solid first quarter results with strong sales in pharmacy, e-commerce and Fresh.

Kroger identical sales, excluding fuel and adjustment items, increased 3.2%. And adjusted net earnings per diluted share was $1.49 in the first quarter, which was an increase of 4%.

Now let's take a closer look at the quarter. Strong performance in fresh categories supported our identical sales without fuel results. Fresh identical sales were better than center store sales. We know our customers want healthier options, and we are well positioned to deliver them across our fresh departments.

Turning to Our Brands. As more customers search for value, we are excited about the potential for the Our Brands business. We are growing sales by offering high-quality products to customers at all budget levels. This quarter, Our Brands grew faster than national brands for the seventh consecutive quarter. Simple Truth and Private Selection led our sales growth, highlighting that customers want premium products, while also spending less. Our Brands is also creating new products that support customers' healthier eating habits.

For example, earlier this year, we identified protein as a major customer trend. And soon, Simple Truth will introduce 80 new protein products to our assortment. Targeted directly at this important trend, these products include everything from bars and powders to shakes, all from a natural and organic brand that customers trust. This is just one way that Kroger and our brands are innovating to stay ahead of what our customers want.

E-commerce continues to be a key part of our business with 15% growth in the first quarter, driven by strong demand in delivery. To keep improving the customer experience, we are working to deliver more accurate orders faster and reduced pickup wait times. These improvements are attracting new households to e-commerce and giving our current households more reasons to shop with us. As our e-commerce business grows, it represents a bigger impact on our results. Our teams are committed to growing both e-commerce sales and improving profitability. During the first quarter, we made good progress. and delivered our best profit improvement yet on a quarter-over-quarter basis.

To continue driving improvements, our team is reviewing all aspects of our strategy and operations to improve the customer experience as well as the financial performance. David will share more on this topic later. We know that our best customers shop with us through both e-commerce and in stores, which makes it important for us to continue building and running great stores.

Today, we are on track to complete 30 major storing projects in 2025. And looking forward, we expect to accelerate new store openings in 2026 and beyond in high-growth geographies, growing our overall square footage and adding new jobs.

As I mentioned earlier, we're simplifying our business and reviewing areas that will not be meaningful to our future growth. Unfortunately, today, not all of our stores are delivering the sustainable results we need. It's also important to note, we paused our annual store review during the merger process.

To position our company for future success this morning, we announced plans to close approximately 60 stores over the next 18 months. We don't take these decisions lightly, but this will make the company more efficient, and Kroger will offer roles in other stores to all associates currently employed at affected stores.

To recap, our top priorities are clear. We're going to move with speed. We're going to concentrate on our core business, and we're going to run great stores. This is how we'll position Kroger for long-term performance.

Before David gets into more detail on our financial results, I'd like to talk a little bit about our broader operating environment. Customers continue to spend cautiously in an uncertain economic environment. Many customers want more value, and as a result, they're buying more promotional products and more Our Brands products. They're also eating more meals at home. Kroger is well positioned to support our customers' changing shopping habits. We offer compelling promotions and fuel rewards, outstanding Our Brands products, and personalized promotions that offer families better savings on the products they use the most.

We're simplifying our promotions to make it easier for customers to save and to see clear value at the shelf. In fact, we have lowered prices on more than 2,000 additional products so far this year. As part of our work to keep prices low, we're also watching the changing environment around tariffs. Our business model is flexible to respond to those kinds of shifts. And as a domestic food retailer, we expect a smaller business impact than some of our competitors.

Where we do see potential tariff impact, we are proactively looking for ways to avoid raising prices for our customers, and we consider price changes as a last resort. Tariffs have not had a material impact on our business so far. And given what we know today, we do not expect them to going forward.

I'd like to spend a moment talking about our associates. Our associates are the backbone of our company and are the people who create a great customer experience. One of our top operational priorities is improving in-stock levels, and we improved in-stock rates in every division this quarter. I appreciate our associates' hard work every day to make this happen.

We continue to improve our associates wages and benefits, while investing in their development and well-being. These investments include hourly pay plus health care and pensions as well as technology that makes work easier in our stores, including a virtual AI assistant that is improving associate productivity and engagement. This well-rounded approach is producing results with both store and company retention rates reaching record levels this quarter. And when our associates stay longer, they learn more, take on additional responsibilities, and deliver a better customer experience, which leads to better sales.

With that, I'm happy to welcome David Kennerley, Kroger's Chief Financial Officer to our earnings call today. We're excited to have David with us, and I'm confident he will help us accelerate our growth and improve our capabilities in a number of areas. As part of his role, I've asked David to lead initiatives across several areas, including cost optimization, efficiency and real estate, so we can put more investment in our stores as well as our customer experience.

Now I'll turn it over to David, who will review our financial results in more detail. David?

Thank you, Ron, and good morning, everyone. It's an honor to be here today for the first time as Kroger's Chief Financial Officer. Over the past few months, I've had the opportunity to meet teams all over Kroger and I've been impressed by the breadth and depth of talent in this great organization. My immediate focus is to build upon Kroger's existing momentum, leveraging our collection of unique assets and financial strength to accelerate our performance. To achieve this, I'll be concentrating initially on a few key priorities. First, capital allocation. We'll be highly disciplined in how we deploy capital, ensuring we invest in projects that generate strong returns with clear objective of improving ROIC over time.

Second, cost optimization. We will focus on optimizing our cost structure, ensuring it aligns with, and supports our long-term financial targets and drives operational efficiency. We're going to modernize operations and ways of working across the board from corporate to our stores and supply chain to work smarter and more efficiently.

Next, improving e-commerce profitability. While we've seen positive momentum here, my objective is to accelerate this improvement. As Ron said, we plan to review all aspects of our business to drive greater efficiency within our e-commerce cost structure and support growth for higher-margin revenue.

Finally, growing market share. Kroger's collection of assets positions us well to win and grow share. My focus will be on ensuring we prioritize our resources to drive profitable market share growth, including an acceleration of storing projects and more competitive pricing.

Kroger is a world-class retailer today, and we are well positioned for long-term growth. My objective as CFO is to ensure we appropriately allocate our resources to where we have the best opportunity to grow and win, while delivering strong financial returns.

I'll now walk through our financial results for the quarter. We achieved identical sales without fuel growth of 3.2%, excluding adjustment items. Our sales growth was led by strong pharmacy, e-commerce and fresh sales. We are encouraged by organic script growth, including growth in non-GLP-1 prescriptions.

Over recent quarters, we've seen improvement in grocery volumes, particularly in the perimeter of the store, which contributed to our sales growth this quarter. Volume improvement remains a key priority for us, and we expect sequential improvement throughout the year. We saw inflation slightly below 2% in the first quarter, in line with our expectations at the beginning of the year.

Our FIFO gross margin rate, excluding rent, depreciation and amortization, fuel and adjustment items, increased 79 basis points in the first quarter compared to the same period last year. The improvement in rate was primarily attributable to the sale of Kroger Specialty Pharmacy, lower shrink and lower supply chain costs, partially offset by the mix effect from growth in pharmacy sales, which has lower margins.

After excluding the effect from the sale of Kroger Specialty Pharmacy, our FIFO gross margin rate improved by 33 basis points. The operating, general and administrative rate, excluding fuel and adjustment items, increased 63 basis points in the first quarter compared to the same period last year. The increase in rate was primarily attributable to the sale of Kroger Specialty Pharmacy and an accelerated contribution to a multiemployer pension plan, partially offset by improved productivity.

Consistent with our approach to managing future obligations, we made a strategic pension contribution this quarter. This allows us to prefund future requirements and importantly, help secure long-term benefits for our associates. Multi-employer pension contributions drove a 29 basis point increase in our OG&A rate in the quarter. After adjusting for the effect from the sale of Kroger Specialty Pharmacy and the multi-employer pension contributions, our OG&A rate was relatively flat on an underlying basis.

As I mentioned earlier, cost optimization is one of my top priorities. We will look for new ways to modernize work and operate more efficiently, not only to fund investments in our customer experience but also to deliver on our financial commitments.

Looking out for the balance of the year, we expect both our FIFO gross margin rate and OG&A rate on an underlying basis to remain relatively flat as we balance price and wage investments with margin enhancement efforts. Our adjusted FIFO operating profit was $1.5 billion, and adjusted EPS was $1.49 in Q1.

Fuel is an important part of Kroger's strategy and offers an important way to build loyalty with customers through the fuel rewards in our Kroger Plus program. Fuel results were behind expectations this quarter and a headwind to our results. Fuel sales were lower this quarter compared to last year, attributable to lower average retail price per gallon and fewer gallons sold. While gallons sold declined compared to last year, our gallon sales continue to outpace the industry.

Fuel profitability was also behind the same period last year as a result of fewer gallons sold. We expect fuel will be a headwind to our results for the remainder of the year.

As Ron shared earlier, our e-commerce business continued its strong performance. We grew e-commerce sales by 15% and increased our rate of profit improvement from our previous record improvement in the fourth quarter of 2024. We're pleased with our continued progress and confident we're on the right path, but our clear goal is to accelerate this momentum.

To that end, our new e-commerce structure unifies all teams contributing to our e-commerce experience with a clear mandate to enhance our e-commerce operations for both improved profitability and a superior customer experience. Their efforts will center on deploying new technology, improving density in our fulfillment operations and accelerating the growth of our retail media platform. We expect these initiatives to be significant drivers of our e-commerce acceleration.

I'd also like to provide an update on recent developments concerning our contract with Ocado. Last week, Ocado drew down the entire $152 million from its letter of credit under our existing agreement. As mentioned earlier by Ron, we're undertaking a comprehensive review of our e-commerce operations and reviewing all aspects of the business to drive growth by improving the customer experience, while improving profitability.

I'd like to take a moment to provide a brief update on associate and labor relations. We made significant progress on agreements this quarter. Specifically, we ratified new labor agreements with more than 23,000 associates. Since Q1 closed, we have ratified a new collective bargaining agreement for store associates in our Mid-Atlantic division. And reached a fully recommended settlement for associates in Seattle. In total, this covers approximately 16,000 associates.

Kroger is working to reach an agreement with the UFCW for store associates at approximately 80 King Soopers store locations in Denver Metro, Pueblo and Colorado Springs. Associates at these stores chose to strike for 14 days during the first quarter, and negotiations are ongoing. We respect our associates right to collectively bargain.

As Ron said earlier, we continue to meaningfully improve wages and benefits. The company's investment in associate wages has increased the average hourly rate to more than $19.50. That figure grows to more than $25 with benefits like health care and pensions factored in that many of our competitors do not offer. We are proud to be a retailer, which offers fair wages and comprehensive benefits.

Kroger's goal in every labor negotiation is to provide employees with stability and advancement opportunities, while working to reach a fair and balanced agreement that both rewards our associates and keeps groceries affordable for the millions of families we serve.

I'd now like to turn to capital allocation and financial strategy. Kroger generated strong adjusted free cash flow this quarter, driven by our operating results. Free cash flow is important to our model, providing liquidity to our operations and allowing us to maintain a strong balance sheet. At the end of the first quarter, Kroger's net total debt to adjusted EBITDA was 1.69 compared to our net total debt to adjusted EBITDA target ratio range of 2.3 to 2.5.

Our strong free cash flow and balance sheet provide us flexibility to invest in our business and other opportunities to enhance shareholder value. Our capital allocation priorities remain consistent and are designed to deliver total shareholder return of 8% to 11% over time. We are focused on investing in projects that will maximize return on invested capital over time, while remaining committed to maintaining our current investment-grade rating, growing our dividend subject to board approval and returning excess capital to shareholders.

A key priority for Kroger is to improve ROIC. We expect to do this by improving asset utilization and reallocating capital towards higher-return projects which will drive long-term shareholder value. As Ron mentioned earlier, we have announced plans today to close roughly 60 underperforming stores across the country in an effort to optimize our store network. At the same time, we are actively investing for growth in new store projects. We expect to complete 30 major storing projects in 2025, focusing our investments in high-growth areas.

We will continue to prioritize new store growth and expect these to be a meaningful contributor to our long-term growth model. We're delivering on our commitment to return excess capital to shareholders. We expect our $5 billion ASR program to be completed by no later than the third fiscal quarter of 2025. The ASR is being completed under Kroger's $7.5 billion share repurchase authorization. After completion of the ASR program, Kroger expects to resume open market share repurchases under the remaining $2.5 billion authorization.

Kroger expects to complete these open market share repurchases by the end of the fiscal year, which is contemplated in full year guidance.

I would now like to provide some additional detail on our outlook for the rest of the year. We are pleased with our first quarter sales, which reflects strength in pharmacy, e-commerce and fresh. As a result, we are raising our identical sales without fuel guidance to a new range of 2.25% to 3.25%. We expect second quarter identical sales without fuel to be roughly at the midpoint of our full year guidance range.

With respect to the store closures discussed earlier, we anticipate these will occur over the next 18 months. There is a modest financial benefit to closing these stores. However, we intend to reinvest the efficiencies back into the customer experience. And as a result, this will not impact our full year guidance. While first quarter sales and profitability exceeded our expectations, the macroeconomic environment remains uncertain, and as a result, other elements of our guidance remain unchanged. As such, we are reaffirming our full year guidance for net operating profit and adjusted earnings per share.

I will now turn the call back to Ron.

Thanks, David. We're off to a solid start in 2025, and we are optimistic about the rest of the year. While the broader environment continues to be uncertain, we're focused on serving our customers with great stores. Kroger is operating from a position of strength. Our strategy is flexible enough to allow us to navigate this changing environment.

We are narrowing our priorities and we are moving with speed to deliver customers an even better experience. We are confident that by staying true to these priorities, we will generate long-term growth and attractive shareholder returns.

Before we open it up for questions, I wanted to provide a brief update on the ongoing CEO search. The Board has a search committee in place and is working with a nationally recognized search firm. The Board is fully engaged, but we have no specific updates at this time.

We'll now open it up for questions.

[Operator Instructions] Our first question for today comes from Ed Kelly of Wells Fargo.

David, welcome. I wanted to start just with a question around pricing and your value perception with customers. I think there's -- it sounds like an increased focus around trying to improve the value perception. I was curious if you can maybe talk about how you're thinking about price gaps, the plan here going forward, what you're looking to accomplish? And then most importantly, can you do all this in a margin-neutral sort of way going forward?

Sure. Let me take that one, David, I don't know if you have anything to add. But overall, when you look at our competitive pricing environment, it remains very rational. As we mentioned in the comments, we do intend to continue to invest in lower prices. In fact, we lowered prices in an extra 2,000 items during the quarter. But this is much like we've done in prior years also.

We're also working to make sure that our promotional offers are simpler. They're easier to access by all customers. And those promotional offers have to offer great value as well. I can't comment on others, but I do believe that we were more competitive in Q1 than in Q4 versus our EDLP competitors. I think the positive news is that these pricing investments resulted in better sales, better gross margin and happier customers. So I think this would be probably a good example of us continuing to invest in pricing, while expanding our gross margin rate.

Yes. Just maybe a couple of things to add, Ron. I think the other thing that we're focused on is making prices easier to get. So rather than a customer having to get out their phone to get a digital coupon in store, trying to make customer experience in store much easier for them to access the good prices that Kroger has. And then just on the gross margin comment. I think this quarter is a good example. We've got decent gross margin performance. And as we look to improve our price perception through the balance of this year and beyond, we expect to do this on a margin-neutral basis.

Great. And then just maybe a quick follow-up. It looks to be a bit more of a focus on e-com profitability and improving the impact on the P&L there. Could you just maybe provide a little bit more color around the road map, the size of the opportunity? I'm not sure how big the losses are at the moment in e-com, but any color there that you could share?

Sure, Ed. Let me try to provide a little more color. We have made good progress on e-commerce top line and bottom line during the quarter. As we mentioned in the notes, we combined all of the elements of our e-commerce business under Yael Cosset. Yael is doing a great job. This allows us a lot better focus on our e-commerce business than we've had in the past. It also very clearly allows us to have ownership of the business.

We're taking a look at every single aspect of our e-commerce strategy as well as our e-commerce operations. We're looking at every market, every element, and we're working on a plan to address the performance in each one of those. I think the good news is that we are seeing continued growth in the business, up 15% this quarter. Households and e-commerce are growing. Our customers are embracing the whole digital model of our business, and we are seeing improvements in profitability at an increasing rate.

But to be clear, on the profitability, we're not profitable at this point. And we must become profitable in our commerce business, and we've got a lot of work to do. We will keep you updated throughout the year, but we don't disclose specific profitability by sub-business segment.

Our next question comes from John Heinbockel of Guggenheim.

So I want to start with, Ron, what do you -- how do you look at what is noncore? And that could be non-retail, it could be retail, I guess, it could be at stores. Obviously, the 60 stores, it could be retail divisions, I suppose. How do you look at that? And then on capital allocation, right, high-return projects, where do remodels sit in that prioritization relative to new stores?

Yes. First of all, let me talk to core versus noncore. I mean, the core are the things that exists in our company that are dedicated to serving our customers. And it certainly includes stores. It would certainly include e-commerce. It would certainly include all the alternative revenue streams that those generate. That's how I would define core for the Kroger Company. And I think that's what we need to focus on going forward.

And John, let me just cover the capital allocation comment. Listen, as we think about where we spend capital, one of the reasons we've talked about investing in storing projects is that these projects typically offer higher returns than our average rate of return. And I would say remodels sit somewhere in the middle of our average return rate.

All right. And then maybe as a follow-up, right, David, cost optimization, right? So I think you've had 8 years in a row of $1 billion of cost out. How are you attacking that this differently, things you might be looking at processes versus what you've done over the past couple of years?

Yes. I think obviously, the advantage that Ron and I have is that it's bringing a fresh set of eyes to the business. And I think my conclusion from my first few months, I don't know, Ron feels the same is, listen, I think we've got a really good foundation. And so I see this as operating from a position of strength. And I see this is about going from good to great.

I think there are a lot of areas where we can improve from a cost perspective, whether that be on the direct costs, so our cost of goods sold, whether that be on what I call indirect costs or goods not for resale, whether that be on the G&A line and our corporate expenses. And I think we are looking to tackle this in a number of different ways than we've looked at in the past.

I think the other thing that will also contribute towards better cost performance is what I call kind of ways of working and process improvement. And I think there's a lot of opportunity here to kind of work smarter, more efficiently, more tech-enabled and we've already got some good proof points on that. But we're going to do more of that kind of work. So I think that road map, John, I think we've got some things that we're going to look to get some early wins on the board. But I think this is a pretty significant medium-term opportunity.

Our next question comes from Robert Ohmes of Bank of America.

I was hoping you guys could parse out more the sort of tailwinds to ID sales that you saw in the first quarter. And how we should think about some of those things for the rest of the year? So I think some of the tailwinds there was inflation, I think, obviously, in the first quarter. Can you parse out how much of that was driven by fresh and what the inflation outlook is like?

I think also the GLP-1 tailwind, can you remind us what that tailwind is? And does that continue, do you think for the rest of the year? And then I think you guys did make some comments on volume. It sounds like owned brands volume is pretty strong. Is national brands volume negative for you guys? And is that a trend that continues as well?

Yes. Let me start this. I'll give you some headlines and David can fill in the blanks. As we said, identical sales were really driven by pharmacy. They were driven by fresh categories around the perimeter of our store, e-commerce as well as Our Brands and Our Brands continue to grow faster than the national brands.

I think our identical sales improvement also reflects some of the continued sales momentum in our core grocery business. We saw that beginning in Q4, and that continued in Q1. And finally, we should give some credit to the divisions. I mean there was really strong execution on the part of our stores team to better serve our customers and all of those things certainly help drive identicals as well. And given the increase in our identicals guidance, we expect to see a continued improvement in grocery volumes throughout the year.

And David, I don't know if you want to add?

Yes, a couple of things to add. So just on the inflation outlook. So we saw inflation just under 2% for the quarter. We guided to 1.5% to 2.5% for the year. So we're well within the guidance range and absent any major disruption, we expect to continue to be in that range. And then just on pharmacy, just a couple of points. I think important to note that ESI had a very minimal impact to the quarter, less than 10 basis points, and we continue to see good growth from GLP-1s.

That's really helpful. And just a quick follow-up would be 100,000-plus customer versus low-income customer. Anything you can share on what you're seeing there?

What we're seeing is different shopping behaviors and different shopping patterns. For example, we are seeing both, I think, shopping more at Kroger stores and grocery stores compared to eating away. They're making more frequent trips to the store. The average basket is less. When you look at the spend in total, I think it's been very stable.

One factor is kind of interesting is that inflation has been higher for food away from home or restaurants. Inflation of restaurants has been high for 27 consecutive months versus food consumed at home. I think both in high and low income levels, they're navigating a significant uncertainty.

I think consumer confidence is down. Customers are looking for value. And I think when you look at how we respond to that, we're always looking for ways to deal with the environment and bring value to our customers and whether that's Our Brands, whether it's having the right promotions, having the right promotional pricing. We are kind of seeing a shift into larger pack sizes and increased use of coupons. We're seeing some discretionary spend.

It's a little softer in areas like snacks and adult beverages, pet, general merchandise categories. So I think in terms of the consumer, we expect the consumer to remain cautious throughout the year. And we're responding to that with simpler promotions, coupons, lower prices and a lot of owned brand choices.

Our next question comes from Simeon Gutman of Morgan Stanley.

Follow-up on sales and market share. Curious if you -- when you look at market share, how you viewed the performance in the quarter, realize that the national data we see, it's not perfect because it's national, but it did look like you inflected in the first quarter. You mentioned the ESI was pretty minimal. So curious how you view it? What would you attribute to the inflection? And was it e-commerce and was it broad based?

I think I've known you long enough to -- for you to understand that no good retailer is ever happy with their market share. It's really a critical metric in any retail business, and the goal has got to be to improve market share. The biggest driver of market share for us relates to opening new stores. We have seen very modest store growth over the last several years during the merger process.

We did see significant improvements in Q1 and we saw market share gains in markets where we have added stores. Again, I don't want to discount the other driver in market share gain, and that's in-store experience. Customer service getting better, competitive pricing getting better, simpler promotions, in-store conditions, and we're starting to see some progress there.

And then finally, when you're growing your e-commerce business at 15%, that will help your market share as well as accelerated growth in our Kroger Brands portfolio as well. I don't know, anything else you want to add, David?

Nothing. You covered it all.

Okay. A follow-up. Different topic. E-commerce. I don't know if it's too early, but can you tell us -- if you look at the investments that this company has made, do you think you need to step them up in order to scale quicker or accelerate growth or they'll be funded and you don't think that's a question.

And then connected to it, I'm trying to understand the way you position the Ocado pulling down the revolver and then talking about how you need to evaluate what this looks like. So thinking about how you deal with e-commerce over the next several years? Could there be another big step-up in investment to allow you to reduce cost to serve and accelerate speed? Or do you think you have the foundation in place today?

Well, I think we have a terrific foundation in place in our e-commerce business, and we have invested heavily in our e-commerce business over the last several years. We are, I think, offering a better customer experience. We're improving things like wait times. We're delivering faster. The number of households is growing, particularly in the delivery side.

And the nice thing about sales, it improves your density for your delivery route. So there's a lot of goodness coming. But I think it's a little early to say exactly what we're going to decide on each one of these. But the investments that we've made have been helpful. But going forward, we're going to look at every investment that we have made or will be making. I don't know. You want to talk about Ocado?

Yes. Let me cover the Ocado question. So the Ocado contract had a clause in it on the seventh anniversary, they were able to draw down the remaining balance on the letter of credit that had been provided, and they chose to do that. So I think it's a contractual thing and nothing more.

Our next question comes from Paul Lejuez of Citigroup.

Can you talk a little bit more about the Our Brands portfolio, the growth you saw in that segment of the business versus the rest of the store and how the gap between the 2 are trending?

And then I'm also curious, if you could talk about any regional differences that you might have seen this past quarter, whether any certain regions stand out is getting more or less promotional or rational however you want to frame it?

Yes, I can start with Our Brands. As we noted, we had another strong quarter in Our Brands, I believe -- and I'm an optimist, understand that, but I believe there's a big opportunity for Our Brands products that could accelerate this even further in the years ahead.

The quality is terrific. It creates great value to our customers. It allows us to lead the pack, I think in product innovation, and I referenced the Simple Truth protein line. But I think that's a great example of that. People are eating healthier. So we're going to jump on that trend. I think high protein products also ties into customers using GLP-1 medications.

And the best part about, Our Brands is that it differentiates us from our competitors. There's only one place you can get Kroger brand or Simple Truth or Natural [indiscernible], all of it, just at Kroger. In terms of regional differences, I really can't point to anything that jumps out of me that, specifically, different. I think we saw kind of good performance across the chain.

I mean maybe the only thing you highlighted is we saw better share performance in those markets where we were building new stores.

Sure.

And I think this was asked earlier, but the higher income consumer, can you talk about the performance with your 100,000-plus customer? I'm not sure if you quantified where you're seeing the greater growth?

I don't know that we did quantify specifically.

I think nothing other than to say that the higher income consumer continues to behave what we would call kind of rationally. I don't think any big disconnects versus previous quarters. Continue to see premium wines, that kind of stuff, sort of increased spend on fresh, normal trends. I don't think anything unusual to note on the higher-income consumer.

Our next question comes from Michael Lasser of UBS.

If we put a picture of what Kroger is experiencing together, perhaps there's a case where the growth in e-commerce as well as the growth in pharmacy are cannibalizing the center of the store. If this continues, is there a point at which the net result of this creates an overall challenge on ID sales? And to what degree is Kroger planning for that potential outcome today in the event that it happens in the future?

Yes. I don't know that we spend a lot of time thinking about that. In fact, we're seeing improved grocery center store trends. We saw that certainly in the first quarter, and we expect to see that through to continue every quarter this year. I don't know there's a specific strategy around that other than running great stores and taking great care of our customers. I think we'll benefit whether it's e-commerce, whether it's pharmacy or whether it's the walk-in shopper. I don't -- David, anything you want to add?

Nothing to add. I agree.

And my follow-up question is you stepped up price investments on the 2,000 items, yet what sounds like the selling margin was positive. So where are you finding the offsets within the selling margin to make additional price investments even as your gross margin -- FIFO gross margin is positive.

Yes, let me take that one, Michael. So listen, I think we've got a number of levers that helped us with our gross margins. And I think these are the kind of things that we're going to try to do going forward. So our brand's mix, obviously helps with that. And we also saw good performance from a sourcing savings perspective. So I think that's just a couple of examples of a positive contribution to our gross margin. I think we're going to have to -- that's how we're going to deal with this going forward. So we want to -- so I'd expect sort of a flat gross margin expectation for balance of the year as we look to balance those price investments with those positive contributors.

Our next question comes from Leah Jordan of Goldman Sachs.

Seeing if you could provide more detail on the growth trends in retail media. How has engagement from partners trended, given the dynamic macro backdrop? And just how should we think about the relative impact of profit as we move through the year versus what you realized in the first quarter?

Let me take that one. So I think a couple of things. So first of all, I mean, we really like our offering in retail media. We've got a great suite of products that we see good engagement from brands on. And I think what we feel really good about that we think is differentiated for Kroger is our ability to do what we call kind of closed-loop measurement, which is not only obviously understanding where we spend, but really tracking the measurement through to understand how that directly impacts sales and also customer behavior.

So we think we've got a good product. And certainly, as you know, having spent -- I spent a long time on the brand side, brands are wanting to understand how to get the best returns for their dollars. And so for me, that is a very, very powerful set of tools.

Now I think what we talked about in Q4, talked about some spend sort of pullback in CPG spending. We did see continued sort of similar trends in Q1 where CPGs are being cautious with their spending. But I want to reinforce that the business continues to grow at a healthy rate and we do expect to continue to see healthy growth in the business through the balance of the year.

That's very helpful. I just want to have one follow-up on shrink. I mean it continues to be a tailwind for several quarters and called out again this quarter. Could you talk about the magnitude of the impact to gross margin this quarter? What's the key driver for the shrink improvement? And how much more opportunity do you see as we go throughout the year?

So let me talk -- I'll take that one. So let me talk about shrink. Yes, you're right. We've seen good progress, and we've seen good progress across both fresh and we've seen good progress on center store. And I think what we really attribute this to is we've made some investments in some AI-enabled technology and deployed new processes around that technology as well and that's really allowing us to much -- have much better visibility of the inventory we've got in store, Best Buy dates and allows us, therefore, to be much more sophisticated in the ordering that we're making.

So our expectation is we're going to continue to see good shrink performance through the balance of the year. And we'll continue to make investments in this space, provided we will continue to see the good returns that we're seeing.

And just one addition is sales help shrink and more hours in stores help shrink and more focused employees help shrink. So I think there's a lot of things going on to improve our shrink results.

Our next question comes from Rupesh Parikh of Oppenheimer.

So I guess I just want to start with Express Scripts. So I was curious how that ramp is going versus expectations? And then related to Express Scripts, just curious if you're actually building in benefits for the remaining quarters on the top line?

Yes, Rupesh, let me take that one. So as we said, ESI had a very minimal impact on the quarter, so less than 10 basis point impact on sales. The reason we didn't include it in the guide for the year is because we knew it would be difficult to predict because you've got these big commercial contracts, the timing of which they sort of come back on stream is difficult to predict. So I'd say we're on track. But specifically, the guide for the balance of the year continues to exclude ESI.

Okay. Great. And then maybe just one follow-up. Just on trends. Just curious on quarter-to-date in terms of what you guys are seeing so far?

Yes. I would say that the -- we're happy with the way the quarter started and it's in line with the guidance that we communicated in the preprepared remarks.

Our next question comes from Chuck Cerankosky of Northcoast Research.

In looking at your storing strategy and investments in stores, could you give us sort of an overall view of what you're doing there in terms of what you're closing, where you're closing, where you're opening, what type of formats are you favoring? And in the context of other competitors changing their stores, not the least of which are the drug chains, and also the use of pharmacy and fuel in this strategy.

Sure. Let me start on store closures. As we noted, we plan to close roughly 60 stores, and we'll do that over the next 18 months. We usually evaluate individual store performance on an annual basis, and we continue to do that, but we deferred closing any stores due to the merger process. So we see this as an opportunity to move these closed store sales to other stores, and we think that should improve profitability.

There's really minimal financial impact on company results as a result of the store closures. The geography is spread really around the country. It's kind of 1s and 2s by division. And all the associates who are affected will be offered jobs in their other stores. And I'm not sure I got the second point of the...

Yes, it was about the strategy, how we think about opening new stores.

Yes. I mean I think, obviously, new store openings are the biggest driver of market share gains and we're continuing to look at that. And I think we will be investing to accelerate store openings going forward. We don't have a number to share with you this morning, but it will be north of the 30 that we opened this year.

Could you comment on the geography of those openings and the format you're favoring?

Yes. As you know, it takes a while to open a big Kroger store. And we're looking at geography across the country. There's no specific area. We are probably going to favor areas of the country that are growing faster than others. We're going to look at where we have competitive opportunities or growth within cities that we operate in. But it's really scattered around the country and there'll be a variety of store formats, although the marketplace store is a terrific format, and many of them will be marketplace stores.

Our next question comes from Kelly Bania from BMO.

Wondering if we could go back to digital sales and the nice acceleration there sequentially. I was just curious, if you have any specific strategies or factors that you would attribute that to?

And also in that, you noted strong demand in delivery. And I was wondering if you could clarify how much of that is more same-day kind of Instacart driven delivery versus Ocado enabled delivery.

And I just want to make sure if there's any consideration with respect to Ocado and any broader changes? Just want to make sure I understood that commentary clearly.

Yes. I don't know if I can point to any specific strategy. And if I had a specific strategy, I probably wouldn't announce that publicly. But I think it is good growth really across the board. I think it's in all geography. It relates to the entire assortment of our product line. And they always say retail is detail, and this is really basically about chopping wood and doing all the little things.

I think before we consolidated everything under Yael, there were a lot of different parts of our business that we're trying to optimize. That doesn't work unless you have kind of one owner. And I think structurally, that really helped our business because somebody's got responsibility for not only the top line in total, but the bottom line in total and every line on the income statement in between.

Yes. Maybe, Kelly, let me add a couple of things to Ron's comments. I mean, really, our metrics on e-commerce were pretty good across the board. I mean we grew households, we grew order volume, orders per household grew. So I think we saw a number of the metrics that are important to e-commerce, continue or really saw favorable performance. So I thought we were very pleased with that.

On the Ocado thing, just to clarify, just on your other question, listen, it's a contractual thing. We had a clause in the contract that said on the seventh anniversary of the signing of the contract, they were able to draw down the remainder of the letter of credit and an Ocado chose to do that.

Our final question for today comes from Scott Marks of Jefferies.

I wanted to just ask, you made some commentary around Our Brands kind of outperforming the national brands for, I believe, it was the seventh quarter in a row. Have you seen any change in strategy from your branded suppliers, whether it be promotional or otherwise?

I'm not the merchant here, but I think the answer is really not. I think the selling strategies of our suppliers continue like they have been for several quarters. We're not seeing them being more aggressive on pricing or promotion I think it's kind of a bit of a steady state with most of our CPG partners.

Got it. And then just as a follow-up, in light of some of the political backdrop with ban on some artificial food [dyes] and other potential regulatory changes down the pipe. Wondering if you thought about how that might impact the center store part of your business, especially. And any kind of discussions with some of those branded suppliers?

Well, I think there's certainly a trend going on in Washington to eliminate anything artificial and particular in the area of dyes. I mean, I think many CPGs are reformulating their products to address that and deal with that. And certainly, we're all over that for Kroger brands and Our Brands.

I think from a regulatory standpoint, I think we're spending a little more time on tariffs than we are on kind of artificial food ingredients, although our customers are looking to eat healthier and buy healthier products. And I think we are trying to respond to that.

But in terms of tariffs and the question hasn't come up, but we've really seen very minimal impact from tariffs. And where we do see impacts in areas like I don't know, produce, [flours], we are working very hard to mitigate that impact, and we're pushing back on any suppliers who would like to pass along the additional cost. We're looking at some of the country of origin stuff, and we're even discontinuing some items where it doesn't make sense for our customers.

I'll now turn it back to Ron for any further remarks.

Well, thanks, everybody. I appreciate all the questions today. As you know, before we conclude our earnings call, we'd like to share a couple of comments with our associates listening in. To them, I say thank you. I thank you for all your efforts, which made our strong quarter possible. We still have a lot of work to do, and we appreciate your continued commitment to running great stores and taking great care of our customers.

So thanks, everybody, for joining us on the call this morning. We look forward to speaking with all of you again soon. And we hope to see you all in our stores.

Thank you all for joining today's call. You may now disconnect.