The Kroger Co.

Kroger's second-quarter numbers showed a 2% net sales increase and adjusted earnings per share of $1.09, up 5.6%. Core FIFO gross margin expanded 13 basis points, driven by e-commerce profitability and tariff refunds, but partly offset by higher shrink and transportation costs.

Why it matters: We think Kroger's performance highlights a disciplined, value-focused consumer in an increasingly competitive grocery retail landscape. While e-commerce sales (up 20%) helped support lower shelf prices, top-line softness demonstrates the limits of its pricing power. Identical sales grew by just 0.2% as traffic gains were offset by lower spending per customer, regulatory headwinds, egg deflation, and a cyclospora outbreak. We think this weak spending highlights consumers' selectivity and Kroger's weakness relative to scaled mass merchants. Kroger reiterated that the Giant Eagle acquisition remains on track to close in 2027, and we think limited divestitures in overlapping markets should satisfy regulators. However, we don't expect the added density and procurement scale to improve Kroger's competitive standing materially.

The bottom line: We are maintaining our $61 fair value estimate for no-moat Kroger and view shares as fairly valued. Shares are down 7% year-to-date, which we think reflects the market's recognition that improving digital economics cannot outweigh Kroger's structural need to lower prices. We forecast Kroger's gross margin will fall 70 basis points to 22.6% (from 23.3% in 2025) by decade's end, forcing operating margins down to 2.9% (3.3% in 2025), as competition-induced price cuts offset sourcing, retail media, and productivity gains.

Coming up: Kroger will outline its long-term financial framework at an Oct. 20 investor update, including how cost savings will fund low shelf prices and store and e-commerce investments. We expect greater clarity on the magnitude of savings needed to support our forecast of 7% annual EPS growth.

We maintain our $61 per-share fair value estimate for Kroger following second-quarter results, as improving digital profitability and modest gross margin expansion were offset by tepid underlying sales and continued evidence of constrained pricing power. E-commerce sales grew 20%, and core FIFO gross margin expanded 13 basis points, but identical sales rose just 0.2% as higher traffic was offset by lower customer spending. We make no material changes to our long-term assumptions, as we continue to expect persistent value investments and structurally higher digital fulfillment costs to limit meaningful margin expansion despite productivity gains and growth in alternative profit streams. Our valuation implies a fiscal 2027 enterprise value/adjusted EBITDA multiple of roughly 7 times.

We forecast consolidated revenue to compound at 2.7% annually over our explicit horizon (below the historical 10-year average of 3.1%). This is driven by slower near-term comparable-store sales growth assumptions (1.4% on average over the next three years) and our prognosis for fuel sales. Further, we expect net new unit growth of roughly 17 stores per year, roughly in line with the 15-year average of 16, bringing the store base to over 2,800 by the end of the decade. Rather than significantly growing its footprint, we think management will opt to prioritize reinvestment in its existing base and digital capabilities. While we see this course as judicious, we believe it’s a necessary action against the current competitive backdrop versus unlocking outsize growth potential.

We forecast a terminal operating margin of 2.9% by the end of the decade. This primarily stems from our belief that gross margin will compress to 22.6% over the long term amid strong competition on price in a commoditized grocery retail landscape, limiting merchandise upside. We believe the continued shift toward lower-margin e-commerce channels will continue to weigh on profitability, exacerbated by the recent failure of its Ocado automated fulfillment strategy. By unwinding these capital-intensive sheds in favor of store-based picking and heavy reliance on third-party delivery partners, Kroger has forfeited the long-term fixed-cost leverage those automated fulfillment centers were meant to provide, resulting in structurally higher fulfillment costs now. Furthermore, we assume the firm must continuously reinvest in price to mitigate more material share loss to mass merchants and discounters. Crucially, we anticipate these necessary price and digital investments will take longer to pay out than previously modeled. However, we think recent initiatives will facilitate some leverage as Kroger rationalizes corporate overhead, closes underperforming stores, and deploys artificial intelligence-driven inventory management tools to optimize its supply chain and reduce shrink.

We do not assign Kroger an economic moat, as we believe the firm lacks a durable cost advantage and intangible assets. While Kroger has generated a 10-year average return on invested capital of 10%, above our 7% cost of capital estimate, we view these returns as vulnerable to margin erosion from necessary price investments and incremental fulfillment costs due to its expanding e-commerce presence.

The primary driver of our no-moat rating is the absence of a structural cost advantage, despite Kroger’s position as the largest supermarket chain in the US (6% market share of grocery retail, just ahead of Albertsons at 5%). In grocery retail, efficient conversion of sales into profit is paramount. Kroger’s scale does not translate into outsize efficiency gains or a meaningfully differentiated value proposition. As evidence, Kroger chalks up $816 in sales per square foot, $27 in operating profit per square foot, and a 3.3% operating margin, which pales in comparison with regional competitor Publix’s $926, $68, and 7.4% respective marks. This leads us to believe that competitive advantages in supermarket retail primarily stem from localized economies of scale, brand differentiation, and securing key trade areas that limit competitor real estate options. For example, Publix’s store base (over 1,400) is concentrated in Florida and Georgia, with its distribution centers serving 140 stores each, resulting in lower logistics costs per unit because of this density. On the other hand, we believe Kroger’s logistics infrastructure is more of a collection of acquired legacy networks (Ralphs in California, Fred Meyer in Washington, Harris Teeter in North Carolina, and so on), serving about 60 stores per distribution center. As such, Kroger’s supply chain is a more expensive network to generate the same dollar of revenue, and we don’t surmise that national purchasing power alone can overcome this detriment.

Even at a national level, Kroger’s vast assortment of 40,000 stock-keeping units, primarily within the grocery space, has failed to result in a defensible cost leadership position. Unlike retailers like Walmart or Target, where general merchandise (apparel, home furnishings, electronics) makes up one-fourth to one-half of the sales mix, Kroger lacks diversification in its product lineup to help subsidize its lower-margin fare. Aldi, Costco, and Dollar General take this a step further, undercutting Kroger on price by stocking a simplified assortment (1,500, 4,000, and 11,000 SKUs, respectively) and limiting overhead. Kroger’s operating profit per square foot lags Walmart's ($33), even though the grocer generates a higher level of sales per square foot ($816 versus $695). Kroger materially trails Costco on both metrics ($77 and more than $2,100, respectively).

Beyond costs, Kroger lacks moatworthy intangible assets from brand equity or data capabilities. While Kroger’s private-label offerings (spanning multiple price tiers and representing almost one-quarter of merchandise sales) afford consumer insights alongside a margin benefit (of 600-800 basis points), it fails to offer meaningful differentiation for a competitive advantage. Similarly, while Kroger boasts a massive loyalty program (capturing roughly 96% of sales) and leverages fuel centers and pharmacy services to drive traffic frequency, these are defensive retention costs rather than moat-creating differentiators. Kroger Precision Marketing, while capturing high-margin retail media revenue, is another necessary tactic rather than a source of competitive edge. We estimate Kroger captures roughly 1% of the US retail media market, a figure eclipsed by Walmart’s 8% share and Amazon’s dominance (80%). Scale matters in retail media because advertiser demand, pricing power, and closed-loop measurement capabilities improve materially as platforms aggregate larger volumes of shopper data and transaction activity, creating self-reinforcing advantages that smaller players struggle to replicate. Furthermore, Kroger’s e-commerce performance suggests it is failing to capture customers digitally. Kroger’s e-commerce market share eroded from 17% in 2020 to just 12% in 2025, while Walmart expanded its share to 40% (from 35%) and Amazon held its share at 31% over the same period. This erosion occurred alongside the company’s capital-intensive partnership with Ocado, where automated fulfillment centers struggled to gain traction (Kroger took a $2.6 billion write-down on these investments in fiscal 2025). Additionally, unlike Amazon Prime (200 million members) or Walmart+ (32 million), which both leverage broader ecosystem benefits to retain household spending, Kroger’s membership offering (Boost, launched in 2022) remains nascent by comparison.

Kroger’s physical footprint fails to confer a location-based intangible asset, as its mature store network provides little insulation against competitor encroachment. Kroger’s footprint is concentrated in saturated suburban and urban markets where it faces direct overlap with mass merchants, discounters, and other grocery retailers, and isn’t contemplating material store expansion (in contrast to others, such as Aldi, which is growing its 2,600-strong base at a clip of roughly 200 locations per year). The proliferation of last-mile delivery services (DoorDash, Instacart) further threatens this positioning by rendering physical proximity even less of a barrier to price competition. In an environment where price sensitivity is acute and switching costs are nonexistent, we believe this lack of geographic captivity has contributed to Kroger’s recent share loss; over the last five years, the firm has grown its net sales (excluding fuel) at an average rate of 4.1%, trailing US food-at-home spending of 5.2%, a sharp reversal from the prior decade where it outperformed by 1.7% annually. We believe Kroger’s physical footprint offers no sanctuary from the industry’s intense price competition.

Faster-than-expected scaling of retail media and data monetization could lift EBIT above our forecast, funding incremental price investment without margin erosion.

Higher private-label penetration beyond our assumptions could drive mix-led gross margin expansion, leveraging a 600- to 800-basis-point profit premium over national labels.

Accelerated Boost membership adoption could fuel comparable sales growth above our 2.5% estimate, as these members spend nearly 3 times more than nondigital shoppers.

Intense price competition from Walmart, Costco, and Aldi could force deeper price investments, compressing gross margin and limiting cost leverage over the life of our forecast.

A faster shift to digital fulfillment with structurally higher fulfillment costs could keep expenses elevated, delaying productivity gains and pressuring free cash flow.

Its highly unionized workforce (over 50%) could limit labor flexibility, exposing the firm to wage inflation that could outpace productivity improvements, permanently resetting the cost structure higher.