Kroger Company (KR) shares tumbled Thursday after the grocery retailer delivered a reality check on consumer spending, posting earnings that beat expectations but revenue that came up short.

The company reported third-quarter adjusted earnings of $1.05 per share, edging past the analyst consensus of $1.03. But quarterly sales of $33.859 billion missed Wall Street's target of $34.155 billion, a clear signal that shoppers are watching their wallets more carefully.

The Good, The Bad, and The Expensive

Here's where things get interesting. Identical sales without fuel climbed 2.6%, which sounds decent until you remember that inflation makes everything more expensive. The real star was e-commerce, which jumped 17% as more customers opted for online ordering and delivery.

Then there's the elephant in the warehouse: Kroger reported an operating loss of $1.54 billion. Before you panic, most of that stems from a $2.6 billion impairment charge tied to its automated fulfillment network. Translation: The company bet big on warehouse robots and automated systems, and it's not working out as planned. Competition and reduced SNAP benefits have been squeezing demand, forcing management to scale back its automation ambitions.

"Our eCommerce business posted another quarter of impressive performance. We have now completed our strategic review which we expect will make our e-commerce business profitable in 2026," said CEO Ron Sargent, trying to find the silver lining in the automation cloud.

Margins Improve Despite Headwinds

On a brighter note, gross margin expanded to 22.8% from 22.4% a year ago. The improvement came from several sources: the sale of Kroger Specialty Pharmacy, better performance from the company's private-label brands, lower supply chain costs, and reduced shrink (retail-speak for theft and waste).

The FIFO gross margin rate rose 49 basis points, with 25 basis points of that boost coming from the pharmacy sale. The LIFO charge for the quarter hit $44 million, up from just $4 million in the same period last year.

On the capital allocation front, Kroger completed a $5 billion accelerated share repurchase program during the quarter that it had launched in the fourth quarter of fiscal 2024. The company is now working through the remaining $2.5 billion of its $7.5 billion total authorization through open-market buybacks, which it expects to finish by the end of fiscal 2025.

Narrowing the Target

"Given our year-to-date results and outlook for the remainder of the year, we are narrowing our identical sales without fuel guidance to a new range of 2.8% to 3.0%," said CFO David Kennerley. That's down from the September forecast of 2.7% to 3.4% growth. Narrowing the range sounds technical, but what it really means is the company has less confidence in hitting the high end as cash-strapped shoppers become pickier about what goes in their carts.

The company did raise its fiscal 2025 adjusted earnings outlook to $4.75 to $4.80 per share, up from the prior range of $4.70 to $4.80, compared with the $4.77 analyst estimate. So earnings are holding up even as topline growth moderates.

Kroger shares were down 4.08% at $63.50 at the time of publication Thursday, suggesting investors are more worried about slowing sales momentum than impressed by the earnings beat.