Q4 2020 Albertsons Companies Inc Earnings Call
[music].
Ladies and gentlemen, welcome to the Albertsons company's fourth quarter 2020 conference call.
Thank you for standing by all participants will be in a listen only mode until the Q&A session.
This call is being recorded if you have any objections. Please disconnect at this time.
I would now like to turn the call over to Melissa place Us GBP of Treasury and Investor Relations. Thank you you may begin.
Good morning, and thank you for joining us for the average since the company's fourth quarter 2020 earnings Conference call with me today from the company are Vivek, Schenker, and our president and CEO and Bob Diamond and our CFO today, Vivek will share insight into our fourth quarter and fiscal 2020 year and resolved.
And as well as review our progress against our strategic priorities. Bob will then provide the financial details of our fourth quarter and full year 2020, as well as our full year 2021 outlook before handing it back over to Vivek for some closing remarks after management comments, we will conduct a question.
<unk> and answer session I'd 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 or financial performance forward looking statements are based on our current.
<unk> 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 additional information concerning factors that could cause actual results to differ materially.
And from those in the forward looking statements are and will be contained from time to time and our SEC filings, including forms 10-Q, 10-K and 8-K any forward looking statements. We make today are only as of today's date and we undertake no obligation to update or revise any such statements as a result of new information.
Future events or otherwise please keep in mind that included and the financial statements and management's prepared remarks are certain non-GAAP measures and 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 Vivek. Thank you Melissa good morning, Ed.
The one and thank you so much for joining us today.
I want to start today by thanking our associates for their unwavering commitment, particularly all of our customers our communities and each other during every twist and turn to the pandemic over the last year 12.
2020 was a difficult year for all of Us and our Hearts go out to all of those directly impacted by the virus.
2020 was also a transformational year for Albertsons companies, we deepened our relationships with customers and added many new ones sort of execution in stores and through online channels, we accelerated digital transformation of Crosswalk company almost every critical capability and our company is now enhanced with all of the enabled.
And by technology.
We delivered our planned productivity targets and we added to it.
We further strengthened our culture learning how to sustain the flexibility and speed that comes with being locally great. While at the same time, leveraging the scale benefit that comes with being nationally stroke.
As I've mentioned throughout the year, our strategy is focused on building deep relationships with our customers, we support the strategy with our differentiated product offerings and.
<unk> and fresh and on brands, our breadth of assortment. So they can complete the shop with us.
The execution excellence and every store and the suite of omni channel capabilities that allow customers to conduct the shopping with us and any way they want.
Our enhanced loyalty program is also resonating with customers as we provide them with personalized offerings and drive repeat shopping locations.
As a result of our team's execution, we delivered strong performance and the fourth quarter and record results for the year.
Our full year results exceeded our outlook across all key metrics with IV sales up 16, 9% adjusted EBITDA up over 60% to $4 5 billion.
And adjusted EPS growing 212% to $3 34.
And Q4 sales were 11, 8% with continued market share gains in both dollars and units and.
Importantly growth and Q4 remains strong across our geographies, regardless of the level of COVID-19 restrictions in place, giving us confidence and the sustainability of our competitiveness and the future.
Our digital initiatives were the key catalyst for growth in Q4 digital sales growth accelerated to 282% with growth of 258% for the full year.
Membership and adjust for your loyalty program continued to accelerate sequentially and has been up over 20% year over year each quarter and is now of $25 4 million members with the 93, 1% retention rate.
These members have been the key driver of share gains as they spend two six times more than non registered customers. We've also increased the number of actively engage customers almost 10% who spend nearly five times more than a non active customer.
We know our retention rate of 34% greater than the household is actively engaged on the loyalty program.
We closed 2020 with almost 11 million more identified households shopping our stores than in 2019 allowed.
The allowing us to understand which categories the purchasing with us for the first time, how often theyre coming back to repurchase how theyre progressing up the loyalty ladder and the incremental spend levels as they migrate from in store to omni channel engagement with us.
We ended fiscal 2020 with three times, the number of Omnichannel households, compared to fiscal 2019 fiscal year end 2019.
And also spend more with us and are more profitable. We also saw that as customers moved into omni channel. They also increase the spend in our stores with the net growth of 20% per household and the total spend rate two times that of and exclusively in store shopper.
We also we saw even though most law and household early last year purchased two times the number of categories and our stores than the prior year for example, and paper goods and were able to quickly reward. These new category buyers with personalized deals to retain that category of spend in our stores.
At the start of the fiscal 2020 are shared with your four strategic priorities that we are focused on <unk>.
And in store excellence, accelerating our digital and Omnichannel capabilities.
Driving productivity and strengthening our talent and culture.
Regarding and store excellence, our ability to create a one stop shopping experience for our customers has remained the key differentiator for us supported by the quality variety and depth of our fresh and on brands offerings that give us a competitive advantage and.
Fresh we continued to see sales outpace center store by 300 basis points.
Standouts during the quarter was seafood and meat floral as customers continue to spend more time of tone.
This strength continues as we see customers supplementing the weekly stock up shop, filling and with fresh items and smaller chips during the week.
Our own brands portfolio also continues to gain traction driven by the introduction of new innovative products as well as our focus on Albertsons legacy divisions that were historically underpenetrated.
Much of the disruption of the supply chain of the start of the year has abated and penetration continued to improve in Q4 and is now exceeding 25%.
We continue to expect owned brand penetration reached 30% of the next few years with gross margins of approximately 1000 basis points higher than national brands and this should increase our flexibility to grow the business grow the business going forward.
Okay.
We are continuing to innovate and expand our portfolio of brands moving quickly to meet evolving consumer preferences.
As a result, we launched over 200 items in fiscal 2020, well above our stated goal of 800, plus new items for the full year.
We're also working on some exciting changes to our means program that will give us significant growth opportunities with expanding the rollout of our ready meals program and on United Division to other divisions, where we make ready to eat ready to heat and ready to cook meals and our stores.
Finally, we continue to invest in our stores, we opened nine new stores and completed 409 upgrades and remodel projects during fiscal 2020.
Moving on to our second priority the acceleration of our digital and Omnichannel capabilities.
Digital continues to be of key growth driver for us as we achieved over 200% digital sales growth and each quarter. This year, demonstrating the strength of our digital offerings to capture consumer demand for more convenient shopping experiences.
The drive up and grew the go drive up and go grew over 1000% and Q4 and 865% during fiscal year 2020.
We launched 343, new dub locations and Q4, and Doug is not available and 48 120 stores.
Puts us ahead of schedule and we now expect to have Doug and approximately 2000 stores with 98% coverage by the end of fiscal year 'twenty one and.
Both of our prior target of over 800 stores.
We're also extremely pleased about the profit curve and our digital business, particularly and drive up and go we're seeing our incremental <unk> sales driving flow through of mid to high single digits, and we expect that to continue improving as the adult business continues to scale.
And 2020, we saw significant acceleration and consumer preferences towards digital and we drove a step change and the additional offerings to meet this demand during the year, we invested over 300 million to accelerate our offerings and launched new capabilities.
To enhance the customer experience, we've improved our on time, telling and delivery to 95%, enabling consistent on time delivery and Doug pickups, we leverage our loyalty program to provide exclusive events like virtual cook of loans with celebrity chefs.
We began.
The trial of and automated electric delivery robots powered by tortoise and continued to pilot the number of walk up and go options, including walkup counters pickup lockers and Standalone kiosk and.
And we're testing and market and integrated loyalty and E Commerce, app offering and effortless ordering experience through a single interface.
And to improve the profitability of the business, we shifted delivery at many of our locations third party logistics providers to improve speed and lower costs, we improved our picking software optimizing and standardizing the picking process to drive cost reduction to increase fixed per hour and improved auto prioritization.
And from our two MFC installations as in stock conditions and improved we have learned that the labor cost per order can be dramatically reduced without compromising the breadth of assortment and the customization of customer can get from a store.
We are opening of third MFC This week and net plans for an additional six before the end of our fiscal year, bringing our total to nine mfc's.
Our third strategic priority is driving productivity to support reinvestment and the business and help offset inflation.
We achieved approximately $500 million and gross productivity savings in fiscal 2020, as the result of our actions with large contributions from indirect spend and labor productivity and shrink reduction.
Given our progress to date and incremental opportunities. We see ahead, we now expect to exceed our goal of $1 billion and gross savings by the end of fiscal year 'twenty, two and have increased our cumulative target to $1 5 billion.
But the additional $500 million of savings is principally driven by new projects related to the transformation of our supply chain.
And the additional cost reduction programs and further optimization of our promotional spend.
Our fourth priority is strengthening our talent and culture and supporting the communities we serve.
And we're committed to adding talent in key areas and recently announced that we have hired a new chief data officer to lead the efforts and translating data into and enhanced customer experience.
In addition, I would like to call out the contributions of our pharmacy teams to our communities.
Partnering with the department of Health and human services and with local authorities. The administered $3 1 million COVID-19 vaccine doses as of Friday last week.
We're very proud of how nimble on pharmacy teams had been to support this effort delivering the service and our stores and and several offsite locations, enabling easy scheduling through our app executing with high throughput and emphasizing equitable distribution and dispensing of vaccines.
Providing access of vaccines and the 100% of on locations in total we have hired 1000, new associates and train 2000, and pharmacy technicians to support this effort and invested in technology solutions, including handheld devices to make it easier for our associates to facilitate these transactions outside of our stores.
Okay.
During fiscal 2020.
We also supported our communities with food and chairs of tangible donations totaling $260 million.
For example, through our Albertsons Foundation Nourishing Neighbor's program, we gave $95 million to support of support to the communities and which we operate and reached 30 million individuals and over 3000 organizations and we assisted our neighbors and Texas following the unprecedented winter storm the matching the first $250000.
Waste and our stores.
These actions are all part of our ongoing focus on ESG.
We recently completed a new materiality assessment, which will be the foundation for our ESG strategy and initiatives going forward as I referred to will continue to evolve.
We've already identified high priority areas and you can expect to hear more from us on topics, such as diversity equity and inclusion of energy and emissions product and consumer packaging food waste and community stewardship.
And last week, we announced our commitment to setting of science based targets to reduce carbon emissions and now I would like to ask Bob to cover the details of our fourth quarter financial results.
Thanks, Vivek and Hello, everyone.
I'm pleased to provide the details on our strong fourth quarter and record fiscal 2020 results.
For the quarter total sales were $15 8 billion driven by our 11, 8% increase and identical sales.
Our gross profit margin increased to 28, 9% during the fourth quarter of 2020 compared to 28, 6% and Q4 2019.
Excluding the impact of fuel our gross profit margin increased 10 basis points.
Primarily driven by improvements and shrink expense and sales leverage.
Actually offset by investments related to our growth and digital and strategic investments and price.
We continued to see significant sales leverage on expenses and the fourth quarter, excluding fuel and onetime pension charges, our selling and administrative expenses decreased 80 basis points compared to the fourth quarter last year and.
Mental COVID-19 costs during Q4 total of approximately $110 million.
Interest expense declined $28 million to $113 million during the fourth quarter of 2020 compared to $141 million. During the same quarter last year, primarily driven by lower average interest rates as a result of our refinancing transactions and lower <unk>.
Outstanding borrowings.
Adjusted EBITDA was $917 million compared.
Compared to $756 million.
$702 million, excluding the extra week during the fourth quarter of fiscal 2019.
The 30% growth and adjusted EBITDA represents a strong flow through of approximately 15%.
Adjusted net income was $347 million or <unk> 64.
For the fully diluted share compared to $194 million.
Or <unk> 33 per diluted share during the fourth quarter last year.
Turning to the full year, we delivered strong results that were above the outlook, we provided last quarter.
Identical sales finished the year at 16, 9% above our expectations of approximately 16, 5%.
Adjusted EBITDA finished the year at $4 5 billion, driven by strong sales leverage bolt and gross margin and and selling and administrative expenses that translated to strong flow through.
Adjusted EPS finished the year at $3 24.
Which was <unk> <unk> per share above the top end of the range of our outlook, we provided during the third quarter call.
Our strong sales results and.
And our strong results of generated very robust operating free cash flow of $2 3 billion and fiscal 2020.
Our capital allocation priorities remain unchanged and include reinvestment to drive profitable growth.
<unk> deleveraging.
And returns to shareholders through our <unk> 40 per share annual dividend and opportunistic share repurchases.
Capital expenditures were approximately $163 billion during the year and we completed 409 remodels.
We also accelerated technology related investments, including those and digital.
As we've outlined these high return projects included both in store and productivity initiatives and manufacturing and supply chain and and merchandising to expand our meals program as well as and digital including incremental Doug Rollouts and other technology initiatives intended to drive the.
<unk> and.
Future productivity.
But at the same time, we've generated asset sale proceeds of approximately $161 million as we continued to actively manage and selectively monetize our real estate portfolio.
We made significant progress and delevering, the balance sheet and reduced our debt during the year by $400 million and refinance debt at very attractive rates.
These actions will save the company approximately $77 million of interest expense on an annualized basis.
Given these actions and the strength of our cash flows our net debt to adjusted EBITDA ratio is now one five times on an LTM basis.
Finally, we completed stock repurchases of $119 million under the company's $300 million authorization and fiscal year 2020.
Turning to the outlook, we provided this morning on fiscal year 2021.
Like to provide some details and color.
As you know because of the way 2020 played out.
With some of the pantry loading we saw early in fiscal 2020, we think it's appropriate to provide guidance through a two year loans against 2019 to show the step change improvement and our business.
We expect identical sales on a two year stacked basis to be and the range of approximately 909, 5% to 11%.
We expect adjusted EPS and the range of $1 95 to $2 and <unk> per share, which represents over 37% compound annual growth compared to 2019.
We expect adjusted EBITDA and the range of $3 5 billion to $3 6 billion.
Representing compound annual growth of 13% of the midpoint of our range compared to 2019.
We also expect.
The spend one $9 billion to $2 billion and capital expenditures.
Which includes incremental capital for high ROI projects that include and store Remodels that will have near term paybacks as well as our continued acceleration of digital and technology investments.
The implied growth.
And sales and related flow through the EBITDA on a two year basis on this guidance continues to be industry leading.
Even as we continue to make investments designed to drive long term sustainable growth.
As you think about the year.
We want to point.
Out of couple of items that will impact the cadence.
Of the annual guidance within fiscal 2021.
As you know fuel margins spiked significantly during the onset of COVID-19.
And as such we expect fuel to be of headwind during the first quarter of approximately $50 million.
In addition, the incremental productivity savings.
<unk> mentioned, we will be ramping up and more heavily weighted to the second half of fiscal 'twenty one.
Enhancing our confidence in achieving our EBITDA and EPS goals.
Before I turn it back to the back I want to spend a brief moment to discuss the impact of the American rescue plan and act on our multi employer pension plans and which $86 billion were earmarked for underfunded multi employer pension plans.
The net effect of this legislation safeguards and protects benefits of the retirees and these plans for at least the next 30 years.
In terms of the impact to Albertsons companies the.
The multi employer plans that are classified as critical or critical and declining are likely to be eligible for some level of relief under the special financial assistance.
True ARPA.
There'll be amount of financial assistance received will vary by plan.
Currently estimate that these plans represent over 90% of our estimated share of the $4 7 billion total underfunding of all of the multiemployer plans to which we contribute.
Pending details on how the program of work, we expect the financial assistance program will provide the necessary funding for the multi employer plans to which we contribute to remain solvent true.
<unk> 2051.
It also ensures the health of.
Of the PBGC, which is the guarantor of participant benefits for these multi employer plans.
We did not anticipate that our cash contributions to these plans will change and the near term as we continue the we always have based upon the collective bargaining agreements.
And as we have consistently indicated.
The legislation confirms that the underfunded liability.
Related to these plans and is not an obligation of the company.
And now Vivek will provide some closing remarks, okay. Thank you Bob.
And what we turned the Q&A I wanted to share a few closing remarks.
Fiscal 2020 was a transformational year for Albertsons companies and we believe the changes we have made to our business have enhanced our ability to retain our customers continued to drive share growth and grow from a higher baseline relative to our pre pandemic trajectory.
We've learned the loss from the pandemic, both in terms of customer behavior and how to operate the business more efficiently. We are emerging from this crisis more digitally focused both in store and online and elevating the service our customers expect while at the same time being more productive and doing sort of delivering more profitable growth.
We further strengthened our financial position, we've generated strong free cash flow, allowing us to accelerate investments and initiatives that will support future growth reduce debt pay our dividend and repurchase shares.
And through debt reduction and refinancings, we are truly transfer on the balance sheet and we're approaching the future from a much stronger position.
And we are continuing to develop and execute our ESG agenda enhancing the sustainability of our operations supporting the communities and which we operate and investing in people with an unwavering commitment to diversity and inclusion across the organization.
As I reflect on some recent topics of interest and our industry I would like to share some insights on the first seven weeks of fiscal year 'twenty one.
And I realize this is unusual.
But we live and unusual times and you will ask us these questions anyway. So here goes.
Our sales momentum continues with growth and market share and food and of two on a two year basis and new loans.
When looking at our average weekly sales dollar sales are trending at approximately the same levels that we exited the exited the fourth quarter on the seasonally adjusted basis, taking into account and taking into account holidays in spite of significant business re openings across the country.
We are seeing continued strength and sales of items that had been elevated throughout the pandemic such as meat and seafood produce eggs breakfast cereal and high and wines that provide evidence that some important food and beverage categories that shifted from food away from home are still being consumed at home, but we've also seen as we expected.
Some categories falling below pandemic levels, such as suit pasta and pasta sauce.
While food at home inflation is still at recent high levels and could be sustained at these levels for some time, we have planned our business assuming inflation of 1% to 2% this fiscal year.
And we expect the rational competitive environment to prevail and driven by relatively tight supply sophistication and promotion management and more digital promotions.
With all of this as a backdrop, we are confident and our ability to continue to produce strong results.
I wanted to reiterate my thanks to our entire team of approximately 300000 associates I am so proud of what they have done to serve our customers and communities over the last 13 months and we will now take your questions.
Thank you, we'll now be conducting a question and answer session, if you'd like to be placed and the question queue. Please press star one on your telephone keypad.
Information tone will indicate your line is and the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing star one one moment. Please while we poll for questions.
Our first question today is coming from Edward Kelly from Wells Fargo. Your line is now live.
Yes, hi, good morning, guys.
The fact I just wanted to.
First just clarify one thing that you said about quarter to date trends.
I think you said in line with the exit of Q4, So I guess at the end of the day are you talking about quarter to date trends at or above the high end of that 11% number and that you talked about for the tier stack expectation for 2021.
And no Ed the way to think of it is what we've tried to do because it's so difficult to think about the laps and such we have tried to model the business on dollar sales on the weekly basis, Okay and.
And the assumption, we have made going into the years that the dollar sales and the weekly basis will kind of remain like the way we closed out the year of the last few months of how the closed out last year.
And of course, the adjusting it seasonally and Thats, what we have seen so Bob would you add anything to that from the stock.
And yes.
From a stack perspective.
And there.
And there will be some some differences by quarter.
But we think the right way to try to make sure that we forecast of the quarter is as <unk> suggested.
Which is taking a look at the absolute sales dollars and trend goes forward and that's what we've done to begin.
On a year.
And we're tracking along that very closely.
Okay, and just thoughts around how you think about the cadence of the Ids throughout the year of her back to and it's like nine 5% of 11% stack.
I would assume that we have some deceleration on the back half of <unk>. How are you thinking about the cadence of that.
And then I did have a follow up on this.
The differences geographically, because you've said that they've been kind of consistent.
Maybe just more color there because I don't think dining out trends are.
Our consistent record of <unk> seem to be differences.
The states that have less restriction.
For instance.
Yeah, Ed So the way we've thought about the business.
The further out you go the harder.
It comes to predict what the top line is going to be which is why we've said we wanted to have strong productivity programs, yielding and the second half of the year. So if the sales turn out to be better than we had imagined it would be a strong second half on <unk>.
Multiple dimensions, but we've made sure that we have that cushion of productivity and the second half of the year now the sector on the.
The second point in terms of the jump.
Different groups of ethic and Q4, we certainly didn't see it but what happens when you get into Q1.
You are seeing some very big differences and lapse across regions right. So part of it and so we're going through a very noisy period right now between what happened last year and what's happening now so I'm not going to conclude that we are not going to see differences and reopening this quarter, what the statement we made.
And the the discussion was about last quarter.
Okay.
Okay, and then just last one for you the incremental $500 million and cost sales can you just provide a bit more color around.
And they came from.
And then I assume some of this maybe gets reinvested in the business how do we think about sort of like what's reinvest it and what's not and the priorities there.
Yeah, So let's start with that philosophy of.
And we regenerate productivity.
And Theres always the productivity that's going into reinvesting in the business to make us stronger be ahead on capabilities and some productivity Thats always there for a rainy day right to take to the bottom line and that's how we think about it and we'll always have that mindset and this business.
And so now let's talk about the $500 million I would frame it this way.
Sure.
We.
One of the great things about our company is that we are incredibly locally nimble.
And we've learned the locked through the spend that make up of how that is an advantage to us and how we are able to react with speed, but we've also learned through this pandemic what of that is extremely important to preserve okay, and we're going to preserve that but we also we of 13 divisions that we have 13 and supply chain and the company and were 13.
Buying organizations and the company Theyre going to change some aspects of that and by change and some aspects of that we get a lot of leverage both on the supply chain and the design of the supply chain, and what and making things easier for our supplier partners and and the discussions on how we buy so those are completely two new topics that are substantial programs that we've long.
And we will continue over the next two years.
Alright, thank you.
Okay.
Thank you. Our next question is coming from Ken Goldman with Jpmorgan. Your line is now live.
Good morning, Ken Hi, Thank you Hey, good morning, everybody.
I wanted to follow up on Ed's question, but not from this quarter from last quarter when asked.
I think about the gross margin.
And Bob I think at the time, you said it should be relatively flat.
Quantifying and necessarily but I just wanted to see if there was any update there and anything you could tell us about your.
Gross margin ex fuel for 2021 with the with the benefit of a little more.
And one more time.
Yes.
We are still well first of all I'll start off a little bit with the comment that Vivek just made.
Because of some of the productivity initiatives that we have we actually generate tailwind as we call them to our gross margin.
And so because we have that benefit.
We do feel confident that kind of overall work and it ended up with gross margin for fiscal 'twenty one to be <unk>.
Directional too to what we saw here for the full year and 2020 now it wont necessarily be exactly the same cadence by quarter, because there were some and some big swings and the first couple of quarters. So you need to kind of seasonal is that two of typical year.
But overall we feel.
Very good about.
Our ability to the kind of keep gross margins.
At the full year level.
And the <unk>, which is a nice step up from where we were running in 2019 and of course.
Yeah, Ken I mean, if you think about.
I'll give you four initiatives all of these of substantial right. So I've always talked to you about this notion of we're going to have gross margin tailwind that we judiciously invest back so that we can strengthen the business. So four big ones. The first is owned brand penetration coming back and basis points on every one of those items.
The second is we are excited about our shrink initiatives, it's giving us redoubling, our confidence that our shrink initiatives are working and then we just added two big ones supply chain and the entirely the entire cost of goods the buying the cost of buying those things differently right and those things that are mostly <unk>.
National those are substantial pools of gross margin tailwind and then there's the mix issues, but and even those so I'll start with those four and we see we see a lot of upside there.
Okay that is helpful. Thank you and then Vivek I wanted to.
A follow up you gave.
Some examples of some categories that continue to do well.
After some areas of reopened meat seafood cereal line I think you also gave some examples I think you said soup and pasta and maybe pasta sauce that are sort of below recent levels.
I wanted to know if you.
And I don't mean to put you on the spot here, but.
I can understand the meat and seafood sign the west side of the wine side surely but.
What is the distinction between certain sort of center store categories, whether it's cereal or pasta or soup. What do you think is driving one to continue to do better versus another that isn't necessarily doing quite as well is it or is it really just a question of hey people stock up on things like soup and pasta.
And you're just lapping it does that the issue that's it and you got so what youre seeing and so nobody shot on paper and alright. So.
I think we're seeing the things that have been.
The loaded and the store and.
And so thats, sorry, and the pantry, so you've got that that's always there and but youre working more from home and eating of more breakfast at home and you're eating more lunches at home, which is continuing to drive that fresh consumption. So it is remarkable and we're continuing to see steady fresh consumption and the same kind of the frequency of purchases on.
Fresh and people are feeling comfortable that they've got enough and the pantry on some other products.
Understood. Thank you.
Thanks, Ken Thank you and.
Next question today is coming from Ravi <unk> from Bank of America Merrill and Youre.
And as an ally.
Oh, Hey, good morning, everybody.
Is that kind of was hoping you could talk a little bit more about the the 1% to 2% food at home inflation assumption that you guys are thinking about for this year and maybe weave into that a lot of the CPG companies have obviously been talking about pushing through a fair amount of price increases this year.
How does that play out and Youre thinking and maybe about.
The you guys mentioned and the press release strategic price investments that you made this quarter. How are you thinking about price investments this year.
And we're seeing the competitive promotions are coming back within the industry you can see it and the Nielsen data, maybe you could just tell us about the scenarios you've been thinking about.
For her how food inflation could play out this year.
So Robert let me give you some context, and then I'll, let Bob add color to it too so the 1% to 2% is a planning assumption and we like that because we know we can at the 3% to 4% inflation.
It's a better thing for our business strike, it's a better it's a better outcome and a P&L. So we plan and the 1% to 2% and then see how and then go from there we're seeing of 3% to 4% inflation.
<unk> seen it now I have no idea of where the inflation is going to land, we don't right but.
But here's a few things to consider one is that.
The demand is still ahead of supply and so many categories. It still the case, okay too we've got a consumer.
And I didn't think we should never generalize this but by and large the consumer's healthy have got cash.
And so.
To meet its of demand driven inflation.
I think youre going to see consumers still shopping.
These categories now when it comes if it goes beyond that 3% to 4% then here's what's going to happen.
We are going to be live and have difficult conversations on how much we can accept because we're not on the pass through all of it and within our difficult conversations up and down the supply chain.
And if it gets to a place where it's going to exceed the 3% to 4%. The last thing I'll leave you with is yes the lot.
Of this inflation that youre hearing about from CPG and others.
The nice thing about when it is planned and when it is available when you have some sense for how it might shape up it's more manageable the ones, we worry about of the spikes.
And we're not seeing any of those emerging at this time Ravi, but that's the planning and that's the planning approach, we've taken and the inflation and Bob anything else you'd add.
I think you've covered it well the 1% to 2% really is just our baseline.
Planning process and any upside from that typically will flow through either to the bottom line or we may choose to.
We utilize that to drive the top line, but I think you've covered it well and and pricing Robbie and our pricing investments continue we do it surgically we're doing it and all the time every quarter and different markets and.
And when it comes to promotions.
We are not seeing a significant step up.
Anywhere in the market, we think it's quite rational.
And we're all going more digital so it's not going to be.
It's not going to see of a big step up and the Wednesday of flyer from for pages and pages.
That's really helpful and just a quick follow up on the down the profitability it sounds like you're feeling better about it going forward is that more about.
Efficiencies you figured out on executing that that's made it a lot more profitable and the store level of or are you seeing something on the mfc's working that makes you feel like you may be figured something out there.
So what happens with the Doug.
As you see the orders flow is still going up you can literally see the labor cost curve right. It comes down.
Pretty rapidly and exponential curve and so youll see that and you and your so when you get to a certain level of orders for store the labor cost becomes better and we're starting to get to that right and many of our stores the.
And the second thing we have done we've launched new picking algorithms and the other thing when you get lot more scale you are picking becomes more efficient right. That's why your cost of conservative we've got new picking software and place and the third thing. We're seeing is that as things get better in stock right and we are having or not having to go out of the MFC to go pick and.
The store Youre seeing better efficiencies and the MFC itself. So we are adding all of these up and the Robbie and starting to feel really good that Doug can be of profitable engine.
Within the e-commerce offerings that we have.
That sounds great. Thanks, so much thanks.
Thanks Ravi.
Thank you. Our next question today is coming from the Simeon Gutman from Morgan Stanley. Your line is now live.
And I assume you are the guys.
And this is actually Michael Kessler on on <unk>, I mean that day.
Okay.
First question actually on on.
On your guys' kind of promotional.
Strategies and he's talked a lot about the more targeted and surgical with high level and how much loving it and I can probably.
Progress you guys of need are there any I don't know examples you can point to and EMEA and okay, and kind of an inning or kind of the roadmap.
Roadmap for how that plays out and also how does that kind of interplay with the price investments that from you guys you spoke to and how that how that's trending.
Yes, so think of two different things that we're doing one is.
We have now all of our promotions are made on on one platform across the company and its a platform that our merchants access and because it's all of the technology and we can see the data on our pricing team can look at the totality of the promotions and get a sense for where people are heading so.
What's the does is allows us to maintain that local nature of being reactive and appropriate and the market get being able to see the full picture from here because we are now on one technology platform.
And that's tremendously helpful and the second thing I mentioned views that we now have 25 4 million people on just for you and so we've just added and another $1 million and millions of dollars $1 $1 million, just last quarter and those $25 4 million people get promotions.
And do them.
We can access them. They can access of digitally we access them digitally so at the underlying all of the promotions is the technology capability right. So on that on the second one we've had it for a long time, we just get smarter and smarter about using it. The first one I mentioned, we rolled it out across lost during the pandemic.
Rolled it out and we are continuing to improve it on that one I'd say if that was a baseball game, we're probably not the third inning day right. We have a lot more to go in terms of optimizing it.
Great. That's very helpful. Thank you and the follow up actually on the on Robbie's question on.
Drive up and the profitability of bearing and the comment that <unk> made or one of you guys made on the mid to high single digit flow through on that I guess number one of that is that on.
EBIT basis, and I'd love to hear maybe some of the assumptions that you guys just kind of use as far as increments holiday and how that's how that's factoring into that number and I guess also does that kind of imply that given the incremental cost of delivery versus drive uptake of deliveries more like maybe flattish or even loss, making I guess, how you guys are thinking about.
Looking to improve that or is that something where it's kind of and the reality of the business as it stands right now and Brian.
The second for the led sales.
Yes, let me provide a little bit of context, and then I'll have Bob talk to you specifically about the flow through and the EBIT piece Youre right and the delivery business.
It's not profitable the.
The business is because it's harder to recover the delivery cost and <unk>.
As you know, though we've just have shifted a lot more of that we are using third parties and so we are on the path to improve that side of the business, but that will be the heart of one.
To get right on profitability over time now.
The other thing yes, we are excited about the instrumentality and we can see and can mentality, because we know the customer and we know that she bought other of spent $100 with us typically announced the spending of 125 Bucks with us and so and that 25 boxes coming from E Commerce and.
And so we're able to track that instrumentality, but but we are fully cognizant that you don't build the big business all of purely around the instrumentality because at some point that business still has to become on the unit basis profitable.
But we've got some time right. We've got other things and our P&L that are driving productivity and that can allow us to make these investments and that's how we're working it and I've talked to you about some of those improvement initiatives and E. Commerce for Bob can you clarify the flow to come and yes.
So when we look at Doug.
As you know we had that was our fastest growing segment of it.
Of our ecommerce this past year and because of that we're getting tremendous scale benefits, which are now coming through and our.
And our latter quarters, where we are seeing.
On an incremental basis, the mid to high single digit EBITDA is what we're looking at there.
Which is effectively the same as EBIT and particular business because theres not much amortization.
But.
Anyway. So we just look forward to as we continue to see the business scale EBIT higher as well as factor and the savings from EMS proceeds and the future with that mid single.
Mid to high single digit rate will continue to improve and the only thing I'll add on deliveries. We have prioritized speed. We believe time is money that people are going to expect shorter and shorter delivery windows and rehab, absolutely prioritize that and that fits with what we're doing with stores and Mfc's and we will.
Keep stay on that path for a long time.
Great. Thank you.
Thank you. The next question today is coming from Karen short from Barclays. Your line is now live.
Hi, Kevin.
Sure.
Just wanted to go back to this weekly sales commentary as it relates to <unk>. So if I take what the weekly sales look like they were doing and <unk> I'm not doing average weekly sales per store, but just the weekly sales and.
And I bring that forward to one Q I'm backing into kind of a negative nine and a half comp and <unk> can you maybe just let me know if that's kind of directionally accurate, but I think the way you described it with just a little nuanced.
Yes go ahead.
I'll start off and for the kitchen.
And filling any flex we think I Miss.
First of all of what you need to do is take the.
Look the fourth.
<unk> average weekly sales run rate, but then we had to adjusted seasonally for the first quarter because as you as you know we have stronger <unk>.
Holidays, and the fourth quarter, and we need to kind of normalize there if you will.
So that would be maybe the one adjustment that I would say relative to what I think average and say, yes and no.
I'd, rather not comment on comps at this time.
Karen, but we wanted to give you some sense for the momentum and the business by giving you that those at least that additional information for Q4. The Q1, yes, and the other thing that we feel really positive about is it's not only the continued momentum there, but we're also seeing the continued momentum of market share gains and yes.
Great No. That's helpful. I just wanted to make sure it was.
The very nuanced comment.
And then I wanted to just clarify so when we look at EBITDA.
By my math I think the right number total COVID-19 costs embedded in the 2020 EBITDA number was 875.
So can you just confirm that because I guess, what I'm trying to look at and when I look at the midpoint of your guidance call. It 355 billion for 2021.
Kind of kind of think intellectually about how that should compare to the four five to four that you reported because presumably that 875 million goes away and.
And 2021.
<unk> doesn't increase though like net of net flat number.
And.
Yes, I think you're directionally.
Correct, there and remember that the first quarter had the biggest chunk of it right.
And.
We have had.
<unk> that we had roughly $600 million and the first quarter I think we added back of a small portion of that the.
But that was direct directionally the number there and then we had.
And additional just over $100 million per quarter after that.
Okay, and then sorry, two housekeeping questions.
I don't know if you did give us the fuel in terms of the impact and one Q.
Is there any way you could give us.
For the year in terms of what you thought was outsized and dollars and then the second question I had is just on the hero pay initially.
The initiatives in California, and broadly how have you factored that into your guidance.
Yes.
The first take the fuel piece.
Our intention and what's not to provide quarterly guidance.
For four fuel or any other lines other than we wanted to call out that.
Fuel was going to be a headwind and the first quarter I would say for the year.
It's directionally that amount of of headwind for the full year. So of the impact is really <unk>.
First quarter of primary event, there's certainly.
Smaller impacts by quarter, but I prefer not to try to try the list what those are the kind of net out yes.
Yes and <unk>.
On the.
Hazard pay that we're seeing and certain pockets.
And of the country Karen Okay.
Those are those are we are we think that.
And those will abate as vaccination and people get vaccinated and.
I wouldn't want to say, it's non material but.
But it is part of our planning and we are going to absorb it.
Great. Thank you very much.
Thank you. The next question is coming from <unk> <unk> from RBC capital markets. Your line is now live.
Hi, good morning, guys.
And then a couple of quick ones.
And the IV sales guidance, what are the embedded expectations and for share gains and that and then just wondering if you can.
Comment on.
Any potential impact from a stimulus on quarter to date trends.
Yes.
Far as.
Your first question on market share gains I mean, we would hope that we'll continue to see the trend we're seeing now.
That's that's kind of a hard one to predict yes, we move forward so yes.
Thinking of the share gains as we had such a tremendous.
The year in 2020.
And so if you look at it on a one year stack it just becomes difficult share it will.
The likelihood that we would share will look negative, but what we've looked at is on the two year basis and on a two year basis, the substantial share gains and we're seeing that happening even through the first part of this quarter. So and then on on the stimulus. What's interesting is that when we look at different segments of our shoppers, let me stay with income from.
Now.
We continue to see we havent seen a dramatic shift in consumption patterns for lower income households, if the stimulus matter to them.
We were doing better with them the priest.
Free stimulus and we continue to do well with them.
And so I haven't seen the substantially changed from the stimulus itself at least for US. Okay. Thank you. That's helpful. And then just going back to the gross margin again.
Can you talk a bit about some of the mix improvement that you've been seeing there and how you see that playing out of the question of the year.
Mix improvement, it's a very deliberate approach, we take right and that's been historical that the Albertsons company and it's simple as something that sell of cup watermelon of potash asparagus and sort of a whole watermelon and so those initiatives continue we continue to find new ways of doing those types of things the meals initiatives that we're rolling out on.
And again gross margin and <unk>.
And so the proud of the owned brands, our gross margin and the answers when you do well and fresh and we continue to do well and fresh that's the gross margin enhancer notwithstanding all of the other things that I talked about the the productivity productivity oriented right. So again I come back to both of your questions at other.
And on gross margin, we believe that we have plenty of tailwind.
Got it thank you.
Thank you. The next question is coming from Scott <unk> from our five capital. Your line is now live.
Hello, Scott.
Thanks, Hey, good morning, Thanks for taking my questions.
I wanted to talk a little bit about the store environment as you grow pickup and delivery.
How do you keep the store environment.
Good for people that actually want to come into the store.
And then.
Probably rotating labor from customer facing activities to picking activities and the moment to see how you guys are attacking that that issue as well.
Scott, we're not doing the ladder right, we're not seeing a within the sacrifice service and one compared of the store to support and the other part of the store.
So when it comes to the front and we have a completely.
A different system that allocates.
And that allocates.
Of what labor it needs to go to a front end of the store.
And it's based on historical and predict the demand and we do that and we hold people to that standard on that front.
Adding labor.
The store for E Commerce, which is where which is why and you have to add that labor and kind of like block increments. So you don't say, it's half of person and you have to add of block to get it going which is why as orders go up and the store you'll see this thing youll see the improvement and profitability now the other thing and I'll tell you Scott is.
We are we are of higher index on fresh and the way you win and fresh you don't just talk it up in the morning, and and then revisit it at the end of the day of the next morning, you're in the store working fresh all the time and so part of that is.
The labor model that allows us to be greater fresh right and by the way that same philosophy exists and much of the store so and our stores, you'll see people who are working to store through the day, so that the store remains fresh and stopped.
Even while people are picking the store.
And so that's the philosophy, we've taken we've not had run into that issue yet where the store is depleted of overcrowded for E Commerce.
Okay. Thanks, and then.
A follow up to the question of the Wall Street Journal had an article talking about the competition for labor and given the you guys are growing these businesses, where you're going to be adding labor how should we look at kind of labor costs.
As the year progresses is something you guys worry about and what are you doing the control that that line item.
Yes, Scott a lot of our a.
A lot of our labor is the.
Unionized and we have contracts with the with our unions. They come up every so often for renewal and they are typically negotiated for three years of five years.
And so a lot of our wages are in that sense predictable.
And so we really focus a lot more on ours. So you add hours and some places and drive productivity and other places to take the hours back out.
And then we of all of these initiatives right.
And we've talked about in the past.
Far what's in ordering program production scheduling programs et cetera that drive and automation that we're doing that continue to drive productivity and labor hours and Thats, how we manage that equation.
Thanks, guys. Thanks.
Thanks, Tom we have time for two more questions Greg.
Certainly our next question is coming from John Heimbach of from Guggenheim. Your line is now live.
Hey, John.
Hey, Vivek.
You guys added $4 5 million roughly.
On loyalty customers this year.
And I know.
On the channel was up three ex.
And how many actual.
Omni channel households could you add.
Relative to that I'm curious, how many are coming from is omni channel and then.
And how big is the omni channel customer base today as part of that $25 4 million.
Yes, John let me put it this way we are.
Of our mix of E Commerce has improved dramatically, but we're still behind some others right and that's why we're going to continue to invest and this business.
Because we know that it's resonating and we Havent parsed out those numbers that you're that you just asked me about.
But we are excited about the growth rate, we know who they are and we're going to continue to do to invest in and so the ecommerce business becomes a bigger mix we've got.
We've got a few points of catch up to do on that.
And I think you said the $11 million that was total customers identifiable and enhanced.
Yes, I did the fiber so that's pretty good right because we know some because of the identifiable we know what they're buying.
We know we know what they are buying whether they're going to engage the makeup of it.
So that's the part that were excited about $11 million identifiable customers.
The <unk>.
You added and the $4 $5 million on loyalty rates, So you're still Thats, alright theory, I guess of that.
Five of $6 5 million that are not that are identifiable but not loyalty.
That's right and you go back to be loyal customers and how optimistic are you that you can do that and.
Yes, that's the so.
Our loyalty team is now expanding the way, they're thinking about it John it used to be that our loyalty program was primarily.
And it had a financial incentive at most rewards on fuel oil pricing and now we're starting to open up other things that youll see us launching and the market. So that we can get more of those are the 6 million customers engaged in the loyalty program not prices and prices and the answer for everybody and some people care about convenience and some people care about experiences.
And Thats what were going to us.
Okay. Thank you.
Thanks, Doug.
Thank you. Our next question is coming from real cash free.
Oppenheimer. Your line is on line.
Good morning, Thanks for taking my question, so going back to your Capex guidance of this year, you guided for and increase in Capex of $1 92 billion and as we look forward should we think about this as the right the new base level to think about future of yours as well.
No no don't think of it as as the new base level, we would.
You May recall, we were at about a one 5 billion in the past and we would keep it to that ratio of percentage of sales about about of I'd say two 5% of sales what you should expect and the long run our algorithm for US we are just being opportunistic here of when we have the cash we're pulling forward initiatives that.
And we know.
Clear ROI of winners right. So we've done that and then isn't that $1 nine you will see a substantial investment and our digital agenda building digital capabilities around the company. So we can monetize all of those things I just told John about the 11 million additional customers.
Great and then maybe just one follow up question on free cash flow I know I think there's going to be some specific items that may weigh on your cash flow of such as non payroll tax deferral. So Bob just curious if you can just share of any other discrete items, where should we think you're wrong on the free cash flow side for this year.
You're correct on the free cash flow side or on I'm, sorry on the.
Cares Act that was about 200 and interest over $200 million that will have to pay back.
In the fourth quarter of this year.
Outside of that.
And there is there's really nothing out of the ordinary.
Okay, great. Thank you.
Thank you we reached the end of our question and answer session I would like to turn the floor back over for any further or closing comments.
Very good. Thank you everyone for participating today, one of the point out that there is and info graphics that has been made available on our website summarizing many of the statistics from the call today and if there are any follow up calls Cody and I will be available elevated of course of the day and the rest of the week. Thank you.
Thank you all and thanks Bye bye. Thank you that does conclude today's teleconference and webcast. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.