Q3 2020 Albertsons Companies Inc Earnings Call
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Good morning, welcome to Albertsons Companys third quarter 2020 earnings conference call and thank you for standing by.
All participants will be in a listen only mode until the Q and a session.
Please note this call is being recorded I.
I would now like to true hand, the call over to Melissa play from GBP Treasury and Investor Relations. Please go ahead.
Good morning, and thank you for joining us for the Albertsons Company third quarter 2020 earnings Conference call with me today from the company arc of extra anchoring, our president and CEO and Bob Diamond, our CFO today that well share insight into our third quarter results and recent progress against our strategic.
The priorities Bob will then provide the financial details of our third quarter and share our full year outlook before handing it back over to the SEC for some closing remarks. After management comments, we will conduct a question and answer session.
I would like to remind you that management may make statements. During this call that include forward looking statements within the meaning of the federal Securities laws forward looking statements are not limited to historical facts, but contain information about future operating orphaned annual performance forward looking statements are based on our current expectations and assumptions.
And involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. These risks and uncertainties include those related to the COVID-19 Pandemic addition.
Additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements are and will be contained from time to time in our SEC filings, including form 10-Q, 10-K, 8-K, and our prospectus dated June 25th 2020 any forward looking statements we make.
Today, our only as of today's date, and we undertake no obligation to update or revise any such statements as the result of new information future events or otherwise.
Please keep in mind that included in saying the answer all statements and management's prepared remarks are certain non-GAAP measures and the historical financial information includes a reconciliation of net income to adjusted net income and adjusted EBITDA and with that I will hand, the call over to the back.
Thank you Melissa and good morning, everyone in the good people joining us today.
Well the Albertsons, we continue to be focused on taking care of what customers our associates and the communities to be true.
As the result of this I'm pleased to report the another quarter of robust results or.
Well Q3 identical sales acumen of 12.3%.
The adjusted EPS growth of 275%, which of the probably the euro the 66 cents per share.
Adjusted EBITDA increased 52% of $968 million.
But the flow through our digital true also grew 225% year over year.
During the quarter.
We couldn't hear the gained significant market share within both fuel and put a new low in both dollars and units the an experienced strong growth across geographies, regardless of the level of cold the distinctions in place. This gives us confidence in the sustainability of our competitiveness in the future.
We had over 6 million new households shopping with us this quarter and be of retaining existing customers those who shopped with us last quarter have reported this quarter of hot at a higher rate than Q2 GAAP.
Cost of must continue to consolidate trips and we continued to see fewer trips to the household but lots of baskets of these households of spending more with us compared to last year.
Well the loyalty program continues to show strong growth. We now have 24.3 million registered users an increase of 23.5% year over year and these cost of most of spending 2.5 times more on average the non registered customers.
In addition actively engaged households in our long two programs have increased 17.5% year over year and encompass nearly 40% of transactions and 50% of sales the.
Just cost of most spend 4.1 times more the non active customers.
The strong I'd sales and EBITDA results year to date are also generating robust free cash flow and we are delivering on our capital allocation priorities.
Continuing to reinvest in the business from growth in high return projects. We have continued to pay down debt. We are returning cash to shareholders through our quarterly dividend and an active share repurchase program.
The foundation of our four strategic priorities and the way the drug growth is guided by our constant focus on providing an excellent shopping experience the all our customers.
This is anchored in the strength of our product assortment or the ability to engage and silva of customers across different platforms, our use of technology to enhance the customer experience and the speed and flexibility of our nimble locally focused the operations.
Our first priority is in store excellence awesome.
Our stores the domain the core of our business and we are proud of our convenient locations and the broad assortment of products, we offer to create a one stop shopping experience for our customers.
The quality variety and depth of of fresh an old brands offerings have been the key differentiator of throughout the pandemic and will continue to be an advantage for us going forward.
In fresh we continued to see I'd sales that are higher than our average, notably in seafood driven by sort of the seafood and shrimp as well as the meat driven by the items, such as Bacon beef and chicken and the floral as customers were spending more time the tool are enjoying fresh flowers more often we are.
Current coach the customers were spending more time at home are looking to us for the high quality fresh product. We also believe that purchase of the fresh product drives trips as a lot of customers often stock up on shelf stable the items in one trip, but come back frequently for fresh products.
In Q3 of most loyal shoppers increased the average spend on fresh 200 basis points compared to the average in store total spend the probably the U.
And continued to visit our stores over two times, a week with nearly three out of four trips including fresh.
Precious also been a catalyst in omni channel, especially items, including a high quality needed for the use of increased in the basket compared to be pandemic levels and the further capitalize on the strength, we see in fresh we are expanding our portfolio, but meal solutions ready to eat where do heat and ready to cook that are growing in popularity.
As alternatives the cooking from scratch with plans to introduce the solutions more broadly in the weeks and months ahead.
Our own brands portfolio also remains a competitive advantage for us with $14 billion in sales across nine primary bad range four of which have over 1 billion in sales and with over 12000 items across over 500 categories of broad port product portfolio fits all customer segments and styles.
We have recently seen improving trends in penetration of owned brand sales as temporary supply issues have been abating.
Our own brands penetration exceeded 25% of the last four week period of the third quarter and we remain on track the reached 30% penetration in the next few years the.
The driving growth by expanding these products in Underpenetrated markets and continue to have substantial opportunity in markets, such as jewel Shaw's southern and southern California in.
In Q3, we also saw strong growth in categories that have been popular while customers of spending more time and cooking at home such as Ingredion cheese convenient salads baking items and nuts well.
We're also continuing to innovate and expand the portfolio. We've lost of a 1000 new items through Q3 exceeding our stated goal of 800, plus new items this fiscal year.
Innovation is tailored to contemporary customer needs.
In addition to our value call the brand of the or lower opening price point, we've expanded the selection of family packs with items such as waterfront Beast.
This is true frozen fish line that help stretched the family budget.
In mainstream items, which include our signature select line, we continue to innovate to save time for our customers and recently introduced signature select frozen eggs bugs that provide a quick and healthy breakfast ready is just over the minutes.
And we continue to expand the portfolio and innovate in the premium category and recently introduced signatures of spotting Brook line.
In time for the holidays.
The lifestyle brands organics, and open nature, which appeals to customers looking for organic and benefit of brands saw continued growth strong growth of 12% on a combined basis this quarter.
Finally, we continue to invest in our stores in October we allocated an incremental 200 million of store related capital to accelerate and pull forward priority projects.
In addition, the Remodels, we are using some of the additional capital to accelerate the rollout of our module program, which are discrete high return initiatives focused on customer checkout, and new merchandising offerings and we're accelerating replacement of unproductive subsets of speech itself. So features such as salad bars with additional refrigerated cases in preparation.
A question for the rollout of our meals program.
Moving to our second priority the rapid acceleration of our digital and Omnichannel capability.
We continue to provide our customers with an easy and convenient.
Customer experience, whether that is shopping in our stores using curbside pickup or delivery.
Digital continues to be a key growth driver for us as we achieved our third straight quarter of over 200% sales growth of 225% in Q3 day.
The drive up the group grow over the 800% as we launched 231, new Doug locations during the quarter GAAP.
The other is now available in 1181 stores. This puts US ahead of our schedule and we expect to have dug in more than 1400 locations by the end of this fiscal year as well as more than 1800 locations and the of fiscal year 2021.
We firmly believe some consumer behaviors adopted during the pandemic will continue post pandemic and we believe increased use of digital offerings would be one of the key behaviors that sticks to.
The capitalize on the strength, we are investing over 300 million in Capex and Opex. The accelerator offerings in this area during fiscal year 2020 to launch new capabilities that build on our strength as well as drive scale and profitability for instance, we.
We rolled out zero touch payments capabilities to all of stores in October, allowing instill customers to enter the loyalty credentials for discounts from rewards and pay for their gross of groceries from the phone without touching the pin pad.
We also set up the ability to accept snap for online payment on Doug's orders in a 199 stores and plan to expand the additional stores into delivery orders in the early fiscal 2021.
From a customer experience and convenience perspective, we've made noticeable improvements to Iraq, which have resulted in increased usage and are piloting a number of walk up and go options in select stores in Chicago, and northern California involving walkup counters, lockers, and Standalone kiosks, and our parking lots and.
In addition, the improving the customer experience, we've continued to reduce operational costs and improve overall profitability for instance, the further reduce picking costs as the result of labor planning and process improvements driven in part by the new software that a simplified workflows.
Also planning on adding seven additional M. A c's by the end of fiscal 2021.
Finally, we continue to leverage our large and growing customer database to just for you loyalty program, an increasingly valuable assets, which allows us to utilize data insights to target customers promotions, such as personalized coupons and offers on new products that can increase basket size and deepen engagement with.
Our customers.
Our current strategic priorities driving from productivity to help offset inflation that naturally occurs and things such as wages and benefits and the support reinvestment in the business.
We remain on track the Delaware anticipated savings this year and to achieve a 1 billion in gross savings by the end of fiscal year 2022.
We also continue to identify additional opportunities some.
Some of the examples of savings include aggressively partnering with vendors to reduce both the indirect spend and the cost of owned brands goods. For example, the partner with suppliers the non brands and using the comparative data and analysis, we were able to secure substantial savings from the procurement of owned brands Deli meat and paper goods in Q3.
Expanding the sourcing efforts are on capital procurement, including equipment of items related to store models.
And continuing to drive our ongoing energy efficiency products.
The projects, which save an estimated $14 million in Q3, while also reducing our carbon footprint.
Our fourth priority is strengthening our talent and culture and strengthening the communities we serve.
Guided by diversity and inclusion of throughout our operations and recruiting efforts and of continued to add impressive talent to our team.
We also continue to put our customers in the associates first when it comes to of safety and has now completed the implementation of contactless temperature and health screening for our associates across all of facilities.
In addition, we continue the value the contribution of our associates on the front lines and the awarded and all the $45 million in discretionary of precision bonuses during the quarter.
We're also partnering with the department of Health and human services to administer free Coke at 19 vaccines in the communities in which we operate.
We have begun to Delaware doses of the vaccine in many of our market areas and plan to hire more than 800, pharmacists and pharmacy technicians to ensure of pharmacies with the demand from vaccinations.
At the same time, we continue to support the communities. We serve a lot of proud that our foundation helped generate record breaking numbers for childhood hunger relief in September with $9.3 million and customer donations at our checks tens that enable 37.5 million healthy breakfast for kids in our communities unit.
Day, a combined company and customer the nation's has now topped $110 million.
And importantly, we continue to focus on sustainability we.
We are proud the when the sustained excellence award for our commitment to energy efficiency in our Arizona stores from the annual sort of the project champions of energy efficiency awards by leveraging the utilities rebate program, we saved the energy and reduced peak demand in the region.
And now I would like to ask Bob to cover the details of our third quarter financial results.
Thanks for that and Hello, everyone.
I am pleased to provide details of our strong third quarter results.
Total sales were $15.4 billion during the third quarter compared to $14.1 billion during the third quarter last year. This.
This increase in sales was primarily driven by our 12.3% increase in identical sales, partially offset by lower fuel sales.
Our gross profit margin increased to 29.3% compared to 28.3% in Q3 last year.
Excluding the impact of fuel our gross profit margin increased 25 basis points the.
The increase in gross profit margin was primarily driven by a continued improvements in shrink expense and sales leverage on advertising and supply chain costs, partially offset by expenses related to driving growth in digital and select investments in price, which supported top line and overall market share gains.
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Turning to sales and administrative expenses please.
We saw significant sales leverage and cost control throughout the third quarter, excluding the $286 million charge associated with the previously announced national pension from settlement.
Overall, the improved sales leverage including strong cost control more than offset incremental cold the 19 related cost totaling approximately $105 million, excluding the $45 million and discretionary depreciation bonuses during the third quarter.
We continue to seek efficiencies around procedures and procurement of PPV and cleaning supplies to further optimize these costs as we go forward.
Interest expense was $115.9 million during the third quarter of fiscal 2020 compared to $154.8 million during the same quarter last year.
This $38.9 million a decrease in interest expense is primarily attributable to lower average interest rates and outstanding borrowings compared to last year.
The weighted average interest rate decreased 80 basis points to 5.5% compared to Q3 last year.
Which is a testament to some of the recent refinancings, we've completed at very attractive long term borrowing rates.
Adjusted EBITDA was $968 million compared to $634 million during Q3 last year.
The 53% growth in adjusted EBITDA represents of flow through of approximately 20% excluding fuel.
Adjusted net income was $387 million.
And adjusted EPS grew 275% to 66 cents per share compared to of 142 million or 24 cents per share during the third quarter last year.
Turning to capital allocation, our capital expenditures were approximately $1.1 billion during the first three quarters of the year.
And we completed 225 remodels.
We continue to accelerate technology related investments, including those in digital and E Commerce.
As the result of longer than expected order in lead times and some construction backlogs. We now expect to spend approximately $1.65 billion to $1.75 billion in total capital expenditures during fiscal 2020 vs.
Versus our prior guidance of 1.9 billion with.
With approximately 200 million of incremental capital spend shifting into the early fiscal 2021.
As we outlined last quarter. These high return projects include both in store and productivity initiatives in manufacturing and supply chain.
In merchandising to expand our meals program as well as in digital and E commerce, including incremental Doug rollout and other technology initiatives intended.
To drive efficiencies and future productivity.
We have successfully executed sale leasebacks and asset sales in recent years.
And during the third quarter, we have had the opportunity to sell a distribution center that was recently closed for proceeds of approximately $92 million.
And together with other surplus properties, we have generated approximately $144 million of asset sale proceeds to date.
Even after this activity we continue to have a significant real estate portfolio appraised at approximately $11 billion.
Okay.
Our strong results of generated very robust operating free cash flow of 1.9 billion year to date.
Our capital allocation priorities remain unchanged and.
And include reinvestment to drive profitable growth.
The continued de leveraging and returns to shareholders through our 40 cents per share annual dividend and we will continue our methodical approach to share repurchase and the tend to continue actively buying back the undervalued shares.
We were pleased to get credit rating upgrades after.
After our second quarter results were announced based on our strong performance and debt reduction.
On December 27, 2020, we completed a $600 million addition to our 3.5% from.
2029 notes the proceeds from which were used to refinance our 5.75% 2025 notes.
At the same time, we announced the pay down of an incremental 200 million of the 2025 notes with cash on hand.
These actions will save the company approximately $25 million in annualized pretax interest expense and combined with the refinancing and debt reduction from the second quarter, we've achieved approximately $77 million in annualized interest savings this year.
Given these actions and the strength of our cash flows our net debt to adjusted EBITDA is now 1.5 times on an LTM basis.
In line with our 40 cents per share annual dividend, we paid our first quarterly dividend of 10 cents per share on November 10th and earlier. This morning, We announced the next payment date of our 10 cents per share quarterly dividend will be on February 10th.
And the under our current $300 million share repurchase authorization, we actively repurchased 6.8 million shares we viewed as undervalued during the third quarter, which were at an average price of $15 of 10 cents per share for approximately.
$102.7 million.
Turning to the outlook for the remainder of fiscal 2020.
We continued to generate strong outperformance and illustrate the power of sales leverage on our piano during the third quarter.
As a result, we are increasing our outlook for the full fiscal 2020 as follows.
Identical sales in fiscal 2020 to be approximately 16.5% the.
Versus prior guidance of at least 15.5%.
Adjusted EPS in the range of $3.05 per share to Threed dollars from 15 cents per share versus previous expectations of $2.75 to $2.85 per share.
Adjusted EBITDA in the range of 4.4 billion to $4.5 billion versus $4.15 billion to $4.25 billion previously.
And an effective tax rate of approximately 25% before discrete items.
Unchanged from our prior outlook.
The implied growth in sales and related flow through the EBITDA based on this guidance continues to be industry, leading than as you saw during the quarter. These results also include the impact of investments, we're making in the business to drive our goal of long term so.
Sustainable growth.
And now the deck will provide some closing remarks.
Thank you Bob.
As we enter the new calendar year, we are in the throes of the third wave of the pandemic.
Our Hearts go out to the many who have been impacted by the disease.
The promise of the vaccine is exciting and we will do our part the dispense the vaccine and help the communities in which we operate yet.
We realize this is no time to relax we remain relentlessly focused on the safety of our associates and our customers.
Despite the uncertainty we still have around the recovery from the pandemic Bcf.
We see evidence that consumers will not revert to pre cobot food consumption patterns anytime soon.
For instance, several large companies are extending work from home policies and some are committing to flexible work weeks of permanent work from home plans going forward.
We believe that this will continue to drive more breakfast and lunch as at home.
For example, during the pandemic, we've seen large increases in sales of breakfast items, such as cereal eggs and Bacon as people are eating a flow breakfast at home rather than grabbing breakfast from the goal.
And the initial sales of items, such as Sam the cheese and convenient salads of increased as well as lunches are largely consumed the tone.
Many consumers of also rediscovered the passion for cooking.
We anticipate the consumption patterns. We are seeing now will continue well into 2021 adjusted on should continue to favor us.
As I mentioned in the last earnings call, we had a significantly stronger company coming out of the pandemic than we were going into it.
Yet we are only in the early innings of our transformation, we have so much more performance headroom and the wherewithal to invest behind it.
I believe that we will sustain our share gains and improved customer growth and stickiness going forward for a number of reasons.
Our customers are closer to us spending most of us.
Shopping more of our store and consolidating trips with us.
Our customers are engaging more with us digitally as the result, we also have more data on our customers than ever before allowing us to personalize our offers to them.
Taylor of softened, even better and for the improve a loyalty program.
Our omni channel businesses at scale and are capable of the capabilities of achieved the step change, making shopping with us easier than ever yet we have so much more headroom for growth as we mentioned earlier in our rollout plans for drive up and go up.
From a productivity programs are in full flight and the using what we had imagined and will be a strong offset the inflation and support future investment in growth.
Our technology programs also in full flight modernizing our technology infrastructure and moving to the public cloud, making us faster nimbler and spot of the more prolific use of data and automation.
And we are deploying capital prudently, while at the same time, making our balance sheet stronger but.
We're investing in growth such as our fleet of stores, our merchandising, especially meals omnichannel capacity and capabilities and in our ability to personalize solutions for customers, we're investing to drive more productivity such as tools to improve promotions management product the ordering labor scheduling automate.
In in stores and in the seeds.
The investing in our technology backbone to support our growth and productivity. The agenda, we continue to prudently evaluate strategic tuck in and other M&A opportunities our balance sheet. The strong with the net debt to EBITDA of one of the half times, giving us ample flexibility to invest in the business to drive growth.
At the same time, we have found opportunities to refinance our debt extending maturities of better rates and plan to pay down incremental debt over time and.
And we continued to return capital to shareholders through our dividend and share repurchase program.
We believe we are well positioned to continue to drive growth and emerged from the pandemic stronger more resilient and more competitive than ever delivering industry, leading performance. We believe that the behavioral impact of this crisis with the long lasting.
Our job as a management team.
The is to emerge from this crisis.
With the strong omni channel relationship with the customer that we will have long lasting lasting benefit the them our business and all of our stakeholders, even as the pandemic subsides.
This backdrop gives us confidence that we will beat the reaching consensus estimates for fiscal year 2021, and provide an even strong even stronger earnings base line that we can continue to grow based on all of the operating initiatives. We shared with you we.
We remain steadfastly focused on executing our long term strategy. The the unanimous support of our sponsors and our board to the benefit of all stakeholders.
Our sponsors of indicated they have no intention to sell additional stay shares at current market prices.
Even as the underwriters lockup expired in December.
Finally, I would like to close by thanking all of our associates in stores and backstage for the relentless focus on serving our customers and making a difference from the communities we operating.
We would now be happy to begin the question and answer session.
Thank you at this time of the conducting the question answer session if you'd like to ask the question. Please press star one on your telephone keypad. The confirmation total indicate your line is in the question queue.
Any price start to you if you'd like to remove your question from the Kim from.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
To allow for as many questions as possible, we ask that you each keep to one question and one follow up.
Our first question comes from the line of Edward Kelly with Wells Fargo. Please proceed with your question.
Yeah, Hi, guys good morning.
I wanted to start just on the on the ideas and I was hoping that you provide a bit more color around the cadence to the ideas through the quarter, particularly given.
That you know some restrictions around dining out of that type of stuff began to accelerate and then could you comment on what you're seeing so far in Q4 and geographically.
Maybe just provide a bit more color around what you're seeing in some of your markets have much more kind of restrictions.
Yeah.
Hey, good morning, it's for the back here, let me give you a couple of perspectives first you know what was the pricing. This quarter is that the good or do we saw pretty similar ideas across the quarter, Okay, and a little more of a lift around Thanksgiving, which you would expect and I think the lot more people stayed at home at Thanksgiving. So we saw the.
And so thats good and then when we think about this quarter. We are still in the low double digit number as we look at the last few weeks of the the quarter. So we feel good about that trend, which is what gives it gives me some confidence that I asked myself you know if you think of the next six to nine months and 2021 is the.
Going to look more like the last six months or is it going to look more like 2019, and my bias is it's going to look like more like the last six months and the the pattern that we have seen there and what was the second part of your question.
Well geographically and whether things are around a very different yeah. You know I I've said this before I look very hard at whether we see patterns with with the any particular market, where the crisis is worse or better and if the sales change.
What I see in our in our marketplace across the across everything in aggregate is that it seems to go up and down more with the national sentiment that than what anything thats happening in the particular market and we see that again and again and again and as I mentioned earlier you know we are seeing that were called the it's not that strong or at least less civeo, let me preface.
Bad everywhere, the less severe we still see pretty strong sales.
Okay, and then just a follow up on the gross margin I'm just kind of curious how holiday went from a promotional standpoint, how we should be thinking about the gross margin in the fourth quarter related to that and then as we look out into next year. How would you encourage us to think about the gross margin obviously, you've given some kind of how to think about EBITDA, but.
I'm just curious given you know what you're going to be lapping on that line item. Yeah. So let me provide you a point of view on promotions said because some of those might have the same question and then Bob I'll, let you take the gross margin question right. So if you look at the industry overall promotions have stepped up from Q1 to Q2 to Q3 EPS.
Yes, our Q1, two three systems start of the pandemic, but it's still not at the 19 levels.
I think what we at least our priority is to be smarter about it not quantity, but the quality of promotions going forward and we've got the tools and capabilities to do that and the second theme you're going to see from US is the more personalized promotions. We've got a great. The HEYCO to do that we've got a lot of lot of customers registered to do that.
And we're going to put more and more energy towards that so that its high quality targeted promotions, Bob can you comment on the gross margins.
Sure.
Yeah, we have not given the definitive guidance yet for next year, but generally what we would say on gross margins is we'll look at the prior year gross margin and wouldn't look to be you know bill.
The building gross margin materially year over year.
And the you know we do generate some tailwinds and our gross margin. Some of that is driven by continued margin mix improvements the favorites, but what we tried to do is to reinvest some of that back into the top line. So that we are.
Drybar, our bottom line as well, but.
Hopefully that gives you a sense for what when we break it out a little bit further the next quarter that it will you know be.
Probably relatively flat of this year.
Great. Thank you.
Thank you from our next question comes from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.
The warnings is actually at the highlights of the past. Thanks for taking our question. So I guess I wanted to start off talking about your market share.
And it doesn't sound like from the.
The case, but and you look at your recent share gains are you seeing any differences and layer of share gains are coming from the this quarter versus the prior quarter. It sounded like Atlanta pretty consistent to me, but I just want to come from that and then if we think about moving beyond the pandemic and into the public comment Bob on the.
As you look of the share gains of me quite as you know where does your team believe you could see more permanent game preparing pandemic from that category perspective.
Yeah, so the market share gains the way we track it as we track dollars in units and we compare to food retailers and MULO, which includes the whole universe.
And the consistent story throughout the last since the pandemic has been that we are gaining both dollar share and unit share regaining it both of which is food and versus the overall channel MULO, which includes everybody outside of the typical food grocery retailers and the share gains the higher versus MULO right. So that.
Pattern has continued and if you look at the way, we're gaining share the good share gains a higher in some of those fresh categories that I talked about earlier and my sense is about people of gotten used to if if people stay at home and Cook at home, which I believe they will you know I just think the disk.
The sum of this behavior is going to stick and the remote workers good the stick and so as that happens you end up with people spending more on fresh and we have an advantage. There. So I suspect we will continue to gain share on those categories.
Okay. That's helpful. And then you mentioned you know your expectations from people coming at home home line. So yeah with the current back contact you seen so far you know the it's the here you know can you talk about how you're thinking about lapping the more difficult comparisons from fiscal 21 of the quite Uh huh yeah.
Some of the puts and takes care of Navy.
The Sally I touched on previously.
Yeah. So the first of all I think you're right. We're all of we love positive comps rights of looking at any next year is not it's good to be it wouldn't be positive comps, but we will so we are going to think about a two year stack and we'll talk to you about a two year stack. That's how we're thinking about modeling the next year's business and we you know at the end of the day a lot of things.
The doing are about driving growth. So if you think about it from pure dollars, our intent would be to drive drive growth or versus the.
On the two year stack for it to be healthier than what would have been pre pandemic levels. That's how we're thinking about that and I think a lot of the initiatives. Our continued investment in fresh the continued expansion of E commerce, and you're seeing it right and you're seeing the and we know what's incremental arc of continued expansion into meals all of those the.
Things that will continue to drive growth and where we are even putting money as we speak in the white shared with you. The investments we made in E commerce that a part of the Opex and Capex that you're still seeing from us.
But we're also a putting energy and money in to retaining customers right. So we're doing a lot of things to ensure the growth next year.
Okay, great and help our past the not thank you so much. Thank you.
Thank you. Our next question comes from the line of Ken Goldman with Jpmorgan. Please proceed with the question.
Hi, good morning, everybody.
Once again from.
The back you either one of the circle back a little bit toward a pricing you said in the past I think pretty strongly the you don't have much desire to accept and pass on manufacturer's price increases right now but.
Since the last reported quarter and weak freight the number of other inputs have spiked the.
In the last week Conagra highlighted accelerating inflation as soon as the current quarter.
So I'm just curious if you're still as sort of adamant about pushing back on vendor price hikes, because it seems to me like now is the best time in decades to push through some of these higher prices you may never get this kind of inelastic consumer demand again, so I just wanted to get your updated thoughts on that please.
Yes can you know of a first good morning, Oh, Yes, my philosophy, the philosophy will always be to push back on it right I think we should be doing what's right for the customer and we will always have the philosophy of pushing back on it that said we are all this managing a basket to sites. If you look at a price the volume and you look at.
The the market the price of the volume in the market as Oh gone up a little bit or is this it's not as high as it was in Q1 Q2 by the way. So it does come down from Q1 Q2, Q3 overall in the market and we have done a little better than that.
So we got all the out of so we don't we will push through inflation. When it comes true no question about it but on the all the can there's the healthy tension we will maintain with our with our suppliers and make sure that everything is truly justified.
Thank you for that and then from my follow up you know San Francisco in L.A. have proposed mandated five dollar here of pay for grocery workers I don't think either of these type of formally adopted yet, but if they do get approved and of more California counties do take this on you know how do you play.
And on sort of adopting this or pushing back in any way of $5 is obviously a lot more than the you know what many companies are paying right now per hour and the in addition to typical ages yeah.
Yeah, Ken It is in in certain pockets of counties have put such a proposal on the table and it is a more towards grocery not non grocers and so on so it's not clean by any means right and obviously, we wouldn't agree with the philosophy like that so we're working through it bear or <unk>.
If it came down to it Oh, there's many ways to manage it they'll give you give you a perspective.
The large part of our retail work force is part time labor.
Okay. So we've got many ways to manage the managed cost improvements not just from that but the cost increase not just from that kind of of proposal, but overall wage wage management. So we've got many levers to do it and we'll continue to do it but that's a very small pocket Ken just to be clear that we are hearing that.
Thank you for the back.
Well Scott.
Thank you. Our next question comes from the line Robbie Ohmes with Bank of America. Please proceed with your question.
Hey, good morning, and congrats on the another great quarter. Thank you Robby.
Hey, the back I was hoping you could talk you know first of a little more about 10 should or could you give us some color on where you think digital penetration is going to end up for the year as a percentage of sales and and then within that how big is delivery as a percent of digital you know vs. Doug and the maybe you could comment on the yeah.
Guys, a you know moving over to the door day fashion in the strategy on delivery of.
Yeah. So let me start with that of the last one I'm Robbie you know we in our in our press release, when we did that we didn't say that we are stopping delivery and go to the door dash that was picked up it was interpreted that way by some news and the <unk> that picked up some steam so here's the bottom line on that there are markets, where we believe.
Delivery works and there are markets, where we don't believe the delivery of first party delivery works. The way we've designed it and we think the other options that we should continue to explore and I you should be ready that you'll always see the here of news from us that are trying different things. It's the locker in Chicago right. So the always different means of mechanisms that we're going to get things to the customer.
So that's there.
Now from a an E commerce mix standpoint, the fastest growing piece for US is dog and if you do the math you will see that the rate of growth is faster than the rate of expansion right off of our Doug Center. So we know that the customers. It's sticky with the like Doug in all markets and so we're going to continue to double down on that and that the soon becoming the.
The the of bigger portion than our own delivery of the business and from a mix standpoint, I've told you before we're really not lower than others and we have some catch up to do but that's where we are we are we are ex accelerating it as we rollout dog and start getting more and more customers into the franchise, which.
By the way when they come into the franchise they spend a lot more with us we will get to market levels, but really a notch below that.
That's helpful. And then you know maybe my follow up in May and maybe this this the lender being more from Bob but can we get a little color more color on what the digital impact was on gross margin in the quarter, you had that 75 basis point fuel benefit.
You know any any help on what kind of drag that was in then you know when we look to next year. How should we think about you know some of the fuel benefit margins in the in what kind of pressures you could see if that goes the other direction.
Bob could it yes, let me give you a little color there so you're right ex fuel or our margins were up 25 basis points as we indicated in our earnings release. So when you kind of break that apart into kind of the two big pieces.
We between the improvements in shrink and the sale leverage on advertising and supply chain costs that comes to roughly a 70 basis point improvement so.
That was Oh.
Offset by the expenses, including digital and select price investments by roughly the difference the 45 basis points I don't have the us a solid breakout between those but you know maybe roughly 50 50.
That's that's very helpful. Then just any thoughts on you know fuel outlook for next year is the it in terms of impact on gross margin.
Yeah as you know fuel can be a tricky one to try to to estimate of this.
This year has certainly been a boon to.
To everyone I mean on one hand volume server are way down, but then on the flip side.
The the margins are a little higher we would expect next year the.
Now the the volumes will probably start returning the little bit as some people start going back to work.
But at the same time, we're anticipating that some of the peaks of the.
The spikes in the gross margin and fuel Mike kind of moderate just a little bit.
Got you that's helpful. Thanks, again, guys and congrats thank you all of you bet.
Thank you. Our next question comes from the line of John Heinbockel list of benign partners. Please proceed with your question.
Is the vac want to start with the behavior of new customers, whereas you sort of 6 million new households for the quarter I don't know how many for the year.
But what percent of those are registered loyalty members roughly and what percent active members.
And then how do you know how how is their spend ramping as new as new customers, how is that ramping relative to the legacy base.
Yeah. So John day. They go so the 6 million came in right and so about off the 6 million about 900000 say a million or sort of registered or not just for you which is great because they come in they liked the program and in some markets like on the East coast of where we have not had cod for price and we've just introduced just for you and.
The bank it starts the if it picks up I think there's a my the of the customers because the shopping more in the store spending more on grocery just see more value in those reward so that part of it is working and when they when they engage they stop spending a lot more I mean are our most loyal customers a fourx more I think you know could bits could spend.
20000, you're with us a at the top tier and then be breaking the different tiers and then the third tier just as an added side note right away or we call them of their locational and a weak there, but loyal better locational when they get the D. Commerce day spend three X with us the jumps three times. So that's why we find.
This nice ecosystem of E commerce.
And the loyalty program starting to work together.
ER and then maybe secondly.
You guys talked about the 20% flow through right on the sort of an incremental comp the.
Maybe talk about how that works on a comp decline.
Right the compared to that 20% you know assuming sort of the normal gross margin environment and you know other tweaks right you can make on labor and so forth to maybe to keep the two around 20%.
Yeah, So John the of the it's not the it's not a linear curve right. So there's a certain step change above which you get a lot of flow through so as an example of we are not adding store directors were not adding department managers et cetera. So that there is a part of it that's where the fixed and so as the as the volume.
Threshold, our next day I suspect, we'll be above that that minimum threshold then let's talk about the part that's variable, it's primarily things like labor right and the labor in the store, we can manage the hours that there's a lot of part time labor in our stores. So we can manage hours and we've got a lot of initiatives that are aimed at reduce.
Using hours, making the hours more productive and that's happening you know that I was there was critical of it and it's continuing to go of it and they are working well John that's the nice thing you know yeah. You saw some we've had good shrink numbers better shrink numbers right and Bob talks about it and the gross margin of.
We've rolled out tools that up production management tools production scheduling tools that optimizes labor, while it also helps shrink because they're producing the right quantities. So those are the types of things we're doing to also reduce it and keep the kind of flow through.
Okay. Thank you.
Thank you. Our next question comes from the line of Paul Trussell with Deutsche Bank. Please proceed with your question.
Hi, Good morning, the says Christina can tie on for Paul. Thank you for taking the questions I wanted to ask about the hit on grocery economics. You did mention that you saw the reduction in taking cost that was given by the technology. The is there anything additional that you can provide of profit at the any of the channel and secondly, how do you expect the.
The trend when that becomes a larger portion of the ecommerce pie.
Yeah actually bare board excited and Doug becomes a larger portion of our ecommerce portfolio. So think of it. This way I. Let me let me give you a sense of how we think about the math of the ecommerce business first if you were to take all ecommerce transactions the entire E commerce team put it all together and the P. the now our own E commerce.
The business, which is our own pick up of delivery and all of that is the breakeven business. Okay, but I want you to think about that its a breakeven business at a time, where stockouts the higher than normal call outs on our call outs labor called lots of somebody gets sick and income those things are higher than normal okay are the demand.
Patterns of more variable than normal so it's a breakeven business in index and we're investing to make sure. That's the high quality experience. So in that and then in that same p. and now we've got initiatives that are reducing or even improving picking efficiency. We've got the M.F.C. coming so we feel excited about it.
About the core business itself and you know the dog is the more profitable side of it and that's growing faster. So the good take a different inland stake of customer lens to it I know the customer lens, it's even more exciting because as I said earlier, John you know some of our less engaged customers when they pick up E commerce space.
And more with US I know, it's coming from somewhere else. It's leveraging the same store same and our ecommerce the store base. It's leveraging all of the same assets. So in essence, there's more marginal profit from that.
With the lot lot of upside on improving profitability as we think about it.
Got it that's really helpful and secondly, I just wanted to touch on fresh I mean, you talked about price being a differentiator for the all grants and then it is driving the market share gains so to what degree. The you think it sets you apart from the competition and perhaps what are some of the areas in category to the you can improve your.
Operating our service level.
We're always going to continue to improve our offering and service levels right. You know, we're never going to be satisfied by that so as an example, you know we think that meals programs rolling that out would be a big upside a and we've seen that work where we've rolled it out from there continue to expand that so it is not just.
The ingredients, but having solutions for you. So that you may not feel like cooking at home Tonight, and you have a great still have a great meal that feels like it was cooked at home right. So so that kind of thing we will continue to improve some.
Some of the reason, we have a a fresh advantages being the.
Best of the labor in the store, so we had which was announced or I'd be of Baker's announced or you can get a kick back the way you want it you can get to the piece of steak cut the way you want it you Miss it at the restaurant to get it no store.
So there's a level of investment in labor is the level of investment in the choices, we make on our product and those things on the normal times would of been a marginal advantage under the times like this when people are eating a lot more at home is the bigger advantage.
Great. Thank you so much and congrats on a great color. Thank you so much.
Thank you. Our next question comes from the line of Paul Nice way with Citi. Please proceed with your question.
Everyone. The spreadsheet among the for Paul Thanks for taking the question.
I was just wondering if you could talk a little bit about some of the technology improvements that you're investing in I think last time you mentioned the on demand planning system was in 800 stores. So I was just wondering how of that rollout is going and if you're seeing any margin improvement in stores that have that vs stores that day.
And if that contributed to the better shrink this quarter.
Yeah, Brandon the you know the about 30% of of capital of goes towards technology, and so let me just parse that out a little bit for you a good bit of it goes towards improving the infrastructure. So migrating to the cloud on making sure that our systems can ramp up very quickly it was fantastic.
Two of our E Commerce business is on the cloud and when we did that you know we saw very little disruption, even me saw the spikes and such so of that.
That's part of our it gives us better data consolidated data. That's one part of the expense will drive that for the next couple of years and we lap most of that done the other part of it is going to improving growth bitches applications from customer facing applications that we are doing it could be around of the like the automated lockers you'll see.
Moving et cetera. So this types of things that we're doing to drive growth and then there's a bunch going towards the productivity.
Its in store productivity, its DC productivity and in store of the particular things you asked about our ordering systems rolling it out it's been fantastic I always <unk> of my test is going into a store and asking the asking the people in the store how how the system is helping them with their.
Free or or frozen and when they say it's great. It really is great otherwise they don't use it and yes. We are seeing improvements production systems that we're putting into or all of fresh where because of fruit mm.
Make the cakes and everything else all of that is helping that's why you're seeing both labor benefits shrink benefits and like all of these things you. All see also see sales benefits because the a better in stock.
Understood and the on the like owned brands.
You know are you are you facing headwinds with stock outs as a kind of.
On the easier as we've gone from the pandemic.
Better and better so our own brand penetration in the last couple of weeks of the quarter of cross 25%.
So remember we were 25.4 when we finished 2019 and then it had dropped the dropped about a point in the half and it's come right back to a 25%. So we feel good about coming up and start getting them. The other thing that the team is doing very nicely. It's filling in gaps I'm. So when I was saying we want to be more and we're getting into the.
The value packs and so on so we're getting into filling in gaps so that oh, feeling and identifying new needs that the customer cares about today.
Got it so it sounds like on the brands kind of accelerated through the year now you're back to where you were yeah again here I think the the owned brands was the stupid things and on brands you should know why does the supply challenge and the second thing is if you have a shelf of let's say five national brands and the.
Non brand on the novel and then all of of course of business. The non two national brands. The sold a lot of the owned brands of US all the luck when you clean out the whole shelf by definition your mix comes down.
Right.
Got it.
Thank you appreciate it good luck.
Thank you.
Thank you. Our next question comes from the line of Robert Moskow with Credit Suisse. Please proceed with your question.
Hi, Thanks for the question at the.
Thank you talked a lot about improving the selection of ready to eat ready to heat of offerings.
You've also talked about we're moving the salad bar in place of refrigerated space.
And you know I was thinking about that the this is probably one of the bigger merchandising changes that you're doing your store in response to co of it and the consumer need for for more simple meals that they can just pick up and replicate a prepared at home the pair that scratch.
Prepared by scratch, so, but I'm, having trouble figuring out exactly how.
Widespread it is across your chain of how many of your sub chains are are are doing this and is there any way to quantify all of this and and gives a sense of how significant of a of a merchandising shifted it is in terms of more or more.
The more convenient meal solutions.
Yeah. So let me describe the merchandising of Robert of first it is a think of it as a a a few refrigerated units are around the deli counter off of store Deli area of a store alright, and the size of tetra of dose refrigerated units vary depending on the size of the store so.
So from a grant from a merchandising standpoint.
It's very focused and targeted a we think of the says modules and it's doable. So it's not it's not we don't have to consider the remodel the store, we're not thinking don't think restaurants or anything like that no. The bigger challenge is how to make sure that the production is done right in the <unk> and at the high quality what is the right architecture of what can be produced in the store.
Or has to be produced outside the store and that varies market by market and that's what we're working through and deploying it is not at at any scale that we would be proud off but that's the that's the direction. We're going we have it in three markets right now and the one market, it's expanding fast and couple of the markets. We are in experimental stage, but that's going to be a big.
Emphasis as we think about the next two to three years, we think there's a substantial amount of growth too.
Well what about the salad bars are are those still in the vast majority of your stores or the yes slowly coming they are about the look that they're not in many areas, they're not operational because it's just not oh safe at some areas. They are but what do you should know about salad bars. If they don't always I'll give you the greatest return in all markets that are going to.
The places where it matters, a lot where the or near an office complex and you're going to have a lot of lunch business and the salad bar works very well the other markets, where the doesn't and well you always wonder about what is the alternative to it now we have one.
Yeah, great. Thank you.
Thank you. Our next question comes from the line, that's the that Michigan with our five capital. Please proceed with your question.
Hey, guys. Thanks for extra late in the call go low long here and thanks for taking my questions. So I'm wondering is the asking obviously the steers been just tremendous kind of the wind fall and how do you guys think of accelerating some of your gross initiatives too.
Just accelerate share gains and also enhance the customer experience, obviously, the customers changing quite a bit.
From what their expectations are so I was wondering if you could talk about how do you accelerate share gains from when you can do the customer experience.
Yes, Scott the up the cost so number one of first high second.
The second the up the share gain focus for US is continues to be around E. Commerce, Alright, and then continuing to anchored on fresh those are the two areas that we are putting more and more of our energy into on E. Commerce. It's about the expansion of dog. It's include continuing to invest into the front end experience.
The customer has on the ops and such.
I'll give you. An example of the you know we've been talking about drive up and go well there are markets, where the parking lots really small you cant really set aside the satisfied parking spots for it but people are living in tall buildings around you. So we have the locker there or the service where somebody can come and pick up two bags and leave and so yes, we are.
We're trying to find different ways to serve the customer and improve her experience or watch the shops, when you get to the fresh it can <unk>.
I can't say enough. It's about thing that things that are already doing but also improving providing this meal solutions and such so that we can continue to give customers ease ease and convenience yet not having to compromise the quality of what they get enough stores right for me let alone.
Those of the types of things that we're doing and then running great stores every day Scott there's no substitute for that everything we are doing is about getting better every day execution in our stores and hopefully you see that.
So as a follow up is it possible to accelerate capex into productivity enhancing on the.
On the E. Com I know you got your experiments and obviously with the Micrels fulfillment, but is there a of an opportunity to accelerate that investment of.
The need any comments you guys have on some of the Amazon stores had been opened up against you and then I'll yield. Thanks.
Yeah, the cash the capital of about Scott of Artix, expanding if I stay with them of Ses for a second.
We're going to have seven next year and what we're trying to do is to figure out what might be different archetypes that we can use across the markets. We have one oncotype now which is connected to a store and such we are exploring with different archetypes of an M. A C, which we'll do in 2021, and then I think we'll be able to.
The start expanding it more rapidly. So that's that's from Oh, and MFC standpoint on capital that we deploy the in stores such as the capital of did improve ordering systems or capital to improve customer experience of such as the self checkouts and those types of things, we're experimenting there too it tip.
Only doesn't end up being the rate at which you can deploy capital it ends up being the rate at which you can manage change.
And so that it. So you what you don't want to do is to deploy the systems and get orders wrong about the plug the systems and have a lot of the experience for the customer that's usually more of the governor is when you think of that.
Thanks, guys really appreciate it.
Thank you ladies and gentlemen, this concludes our time allowed for questions I'll turn the flow back to net play sounds for any final comments.
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