Q2 2021 Albertsons Companies Inc Earnings Call

October 18, 2021

Welcome to the Albertsons company's second quarter 2021 earnings conference call and thank you for standing by.

All participants will be in listen only mode until the Q&A session.

This call is being recorded.

I'd like to hand, the call over to Melissa Plaisance, G V P Treasury and Investor Relations. Please go ahead.

Good morning, and thank you for joining us for the Albertsons company's second-quarter 2021 earnings conference call. With me today from the company are Vivek Sankaran, our CEO, and Sharon Mccollam, our new President and CFO.

Today, Vivek will share insights into our second quarter results as well as review our progress against our strategic priorities. Sharon will then go into the financial details of our second quarter as well as our updated full year 2021 outlook before handing it back over to Vivek for some closing remarks.

After the prepared remarks, we will conduct a Q&A session I would like to remind you that management may make statements. During this call that are or could 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 expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated.

Additional information concerning factors that could cause actual results to differ materially from those in our forward looking statements are and will be contained from time to time in our SEC filings, including on 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 in the financial 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'll hand, the call over to Vivek.

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Right.

Good morning, everyone and thanks for joining us today.

Before we get started I would like to introduce Sharon Mccollam. So any of you that do not know her new role as President and CFO at Albertsons companies. She will lead all areas of finance, IT, real estate strategy.

Development and supply chain.

As many of you know Sharon officially joined us on September 7th and now has just over six weeks under her belt shoot.

Came out of retirement to join us on our transformation journey and a prior experience at Bestbuy, and with the digital transformation of Williams Sonoma will help us as we move forward.

Prior experience at Bestbuy, and with the digital transformation of Williams Sonoma.

Help us as we move forward.

I'm very excited that she has joined our team.

I look forward to working with her to accelerate our transformation.

We also wanted to congratulate Bob Diamond on his retirement.

Thank him for his seven years of service with Albertsons and especially for his contributions to our successful IPO last year.

Let me now turn to our second quarter results.

I'm pleased to report that our results for the quarter exceeded our internal plans across all key metrics, increasing our confidence in the business going forward.

Sales increased 1.5% in Q2 and 15.3% on a two year stacked basis, we continued to gain market share in food on a one and two-year basis. And the new law, we are up on a two-year basis and down only slightly on a one-year basis.

In addition, we achieved adjusted EBITDA of $965 million and adjusted EPS of 64 cents per share. Ahead of our expectations.

<unk> of our expectations.

Again this quarter against the backdrop of digital sales growth exceeding 200% in every quarter of 2020.

The benefits of our digital and Omnichannel investments continued to resonate with our customers.

In the quarter digital sales increased 5% year over year and increased 248% on a two year stack basis.

Our drive up and go and home delivery capabilities, reaching 95% of our customers.

Increased omnichannel households by over four times versus Q2 2019.

And retention has been strong.

Omnichannel household growth is a key initiative as these customers spend three times more than any in store only shopper.

We also continued to drive year over year growth and identified households, another key initiative that is foundational to better understanding our customers through data analytics, and allowing us to improve our offerings to drive recurring and incremental spend.

Just for your loyalty program ongoing benefit enhancements continue to accelerate membership growth.

Which increased 17% year over year to $27.5 million members.

Within the program the number of actively engaged members increased by almost 9%.

Actively engaged members are those that are redeeming rewards such as fuel or grocery rewards in the current quarter.

In addition, we added 93% retention rate with actively engaged members in Q2.

Remember their actively engaged members spend approximately four times more with us.

We also saw better than expected in store results as traffic in our stores continued to increase versus Q2 2020.

We believe the increased traffic is being driven by our ongoing efforts to protect the health and safety of our employees customers and communities and the higher vaccination rates that are helping customers become more comfortable in returning to stores.

These results reflect the momentum we are seeing through the execution of our transformation strategy across all channels.

The consumer backdrop remained strong throughout the quarter.

I will now take a few minutes to walk through the pillars of our transformation strategy that helped drive these results.

And provide you with an update on our progress these.

These pillars include in store excellence.

Accelerating our digital and Omnichannel capabilities.

Increasing productivity and strengthening our talent and culture.

In store excellence, that's been elevated by providing the right assortment in each local market using digital tools to enhance replenishment and in stock conditions encouraging friendly customer service.

And then tensing speed and ease of checkout through frictionless and contactless payments.

I will briefly touch on recent progress on two elements of our assortment fresh and owned brands.

And fresh our efforts to differentiate our offerings have generated elevated demand.

With fresh growth outpacing centers still by approximately 250 basis points year over year.

Sales in each of our fresh categories remain ahead of pre pandemic levels as customers continue to consume more meals at home.

And on branch the introduction of new products as well as the rollout of owned brands into Albertsons legacy divisions has generated strong growth.

Our Q2 sales penetration was 25.2% up approximately 60 basis points from Q2 '20.

During the quarter, we launched 85, new products, including ready to eat meals refrigerated signature reserve pastas and several organic coffee items.

Year to date, we have launched over 400, new owned brands items and are on track to reach our goal of launching over 800 items this fiscal year.

Finally, we continue to invest in stores. Through the first half of the year, we opened seven new stores and completed 76 upgrade and remodel projects. Our next priority is the acceleration of our digital and Omnichannel capabilities. Digital transformation is an imperative in our growth strategy. As we aim to provide an era of convenient shopping experience for our customers.

Through the first half of the year, we opened seven new stores and completed 76 upgrade and remodel projects.

Our next priority is the acceleration of our digital and Omnichannel capabilities.

Digital transformation is an imperative in our growth strategy.

We aim to provide an era of convenient shopping experience for our customers.

To this end, we've expanded our drive up and go locations to over 1900 and expect to reach approximately 2000 locations by year end.

Underlying the rollout of our digital Omnichannel capabilities is a focus on delivering a superior customer experience as well as improving profitability over time.

For example in drive up and go or average wait time for pickup is now down to three minutes. And delivery, we've continued to speed up delivery times, while reducing delivery cost per order by expanding our third party delivery store network. And we added door dash, one hour delivery to all divisions with a catalog of 40000 plus products.

And delivery, we've continued to speed up delivery times, while reducing delivery cost per order by expanding our third party delivery store network.

And we added door dash, one hour delivery to all divisions with a catalog of 40000 plus products.

And we also announced double dash, allowing customers to combine delivery of our restaurant meal and grocery delivery in one trip.

And micro fulfillment centers we are improving our productivity and our three existing MFCs and we have plans for an additional Florida MFCs before the end of our fiscal year.

We are improving our productivity and our three existing NFC <unk> and we have plans for an additional Florida mfc's before the end of our fiscal year.

Bring the total to seven. This is two less than previously estimated as the launch of two locations just moved into fiscal year '22 primarily as a result of delays in construction.

This is two less than previously estimated as the launch of two locations just moved into fiscal year 'twenty two primarily as a result of delays in construction.

And loyalty our integrated loyalty e-commerce App is now fully rolled out and offers a connected customer experience with redesigned rewards and other new features.

To partially offset all of these investments and cost inflation.

Our third priority is driving productivity.

During the quarter, we continued to eliminate waste and improve efficiencies through enhanced promotional effectiveness, reductions in indirect spend, labor efficiencies and ongoing efforts to reduce shrink.

Enhanced promotional effectiveness reductions in indirect spend labor efficiencies and ongoing efforts to reduce shrink.

We continue to expect to achieve the targeted $1.5 billion in annual gross savings by the end of fiscal year 2022.

Our fourth priority is strengthening our talent and culture and supporting the communities we serve.

Supporting the communities we serve.

We continue to add talent throughout the company at both the corporate and division level, including the recent appointment of sharing.

Our outreach through job fairs for retail and distribution employees and the training we've put in place to assist in the success of our new employees and enhance retention.

Our pharmacy team continues to serve our communities with an area of services, including the Covid and flu vaccines. To date the pharmacy team has administered over $7.5 million Covid vaccine doses.

In support of our associates that were impacted in the communities we serve the Albertsons companies donated $500000.

To provide food to those impacted by hurricane either and the California wildfires.

We also continue to take actions related to ESG and sustainability.

We recently published our fiscal 2020, ESG report, which is available on our company website.

As the next step from our recently refreshed materiality assessment, we will soon release, a comprehensive set of goals in areas, including climate action, diversity, equity and inclusion, waste reduction and circularity. And community stewardship.

Most of the equity and inclusion waste.

Waste reduction and circularity.

And community stewardship.

And now I will turn to Sharon to provide remarks and cover the details of our second quarter financial results and outlook.

Thank you Vivek and hello, everyone.

I'm thrilled to be here today and couldn't be more excited to join this team at such a transformative time in the company's history.

What I have found to be the most impressive since joining it's a disciplined approach that the company is taking to leveraging the favorable backdrop that the industry is seeing today, while at the same time remaining deeply focused on the strategic priorities that the bank just covered and our foundation to advancing the transformation longer term.

Consistent with these priorities, where I am currently spending the majority of my time is in the acceleration of our digital and technology initiatives.

The strengthening of our Omnichannel capability and the advancement of our productivity agenda, including identifying opportunities to further rationalize our cost structure, particularly in the technological enablement of our supply chain and our stores.

I look forward to discussing all of these topics further both today and in our meetings to come but now we'll turn to the details of our second quarter results and provide an update on our fiscal '21 outlook for a two year stack of 15.3%.

As Vivek said earlier, we were extremely pleased with our sales trends as we delivered Q2 2021 identical sales growth of 1.5% on top of 13.8% growth in Q2 2020 for a two-year stack of 15.3%.

Two year stack of 15, 3%.

Total sales in Q2, 2021 were $16.5 billion compared to $15.8 billion last year and $14.2 billion in Q2 2019.

Gross profit margin was 28.6% in Q2 2021 compared to 29% in Q2, 2020, and 27.8% in Q2 2019.

Excluding the impact of fuel however, our gross profit margin was flat compared to Q2 2020 as higher product supply chain and advertising costs were offset by productivity initiatives and favorable product mix and pharmacy margins related to COVID-19 vaccine.

Compared to Q2 2019 gross margin increased 85 basis point, primarily driven by improvements in our productivity, shrink expense, dale leverage and improved pharmacy margins related to COVID-19 vaccine, partially offset by investments related to our growth in digital sales.

Dale Labrador and improved pharmacy margins related to COVID-19 vaccine, partially offset by investments related to our growth in digital sales.

Selling and administrative expenses as a percentage of sales were 25.6% during the second quarter of fiscal '21 compared to 25.6% in Q2, 2020 and 26.8% in Q2 2019.

Excluding the impact of fuel selling and administrative expenses increased 55 basis points year over year.

This increase was primarily driven by higher employee costs, appreciation and expenses related to the acceleration of our digital and omnichannel capabilities and other strategic priorities.

C G HN and expenses related to the acceleration of our digital and omnichannel capabilities and other strategic priorities.

These increases were partially offset by lower COVID-19 related expenses.

As it relates to the year over year increase in employee costs.

Labor related to the reopening of certain fresh departments, such as deli bakery and prepared food.

Market, driven wage rate increases and higher equity based compensation expense contributed to this increase.

On a two year basis, our selling and administrative expenses were down 120 basis points versus Q2 2019.

This decrease was driven by strong sales leverage partially offset by higher employee costs and expenses related to investments in our omnichannel and digital capabilities and other strategic priorities.

As a result of opportunistic refinancing transactions as well as continued debt reduction Q2, 2021 interest expense decreased by 20 million to $109 million versus Q2 2020.

Adjusted EBITDA with $965 million in the second quarter, 2021 compared to $948 million in Q2 2020.

This increase in adjusted EBITDA was primarily due to increased sale partially offset by higher selling and administrative costs.

Really offset by higher selling and administrative costs.

Adjusted net income in Q2, '21 with $370 million or 64 cents per fully diluted share compared to 356 million or 60 cents per fully diluted share in the second quarter of fiscal 2020.

I would now like to discuss free cash flow and capital allocation.

During the second quarter and year to date, we have generated significant free cash flow driven by better than expected operating results as well as lower working capital.

From an investment perspective capital expenditures year to date were approximately $823 million as we continue to invest in our digital and technology platform.

Completed 76 remodels and opened seven stores. For the year, we continue to expect capital spending in the range of approximately $1.9 to 2 billion.

For the year, we continue to expect capital spending in the range of approximately $1 nine 2 billion.

Regarding debt reduction subsequent to the end of the quarter.

We provided notice of redemption of the remaining 200 million of Albertsons, 575% unsecured notes due in 2025, which will save us $11.5 million per annum and interest expense going forward.

And finally in regards to returning cash to shareholders, we announced today, a 20% increase in our quarterly dividend.

From 10 cents to 12 per share based on our confidence in future cash flow generation and our strong operating performance.

I will now turn to our updated outlook for fiscal year 2021.

Given the outperformance in Q2 and recent trends, we have updated and raised our guidance for fiscal year 2021.

We now expect identical sales in fiscal 2021 in the range of negative two and a half to three and a half per cent compared to prior guidance of negative 5 to 6%, representing an updated two-year stack ID range of 13.4 to 14,.4% compared to prior guidance. Of 10.9% to 11.9%. We expect adjusted EPS in the range of $2.50 to $2.60 per share up 30 cents from our previous guidance range.

Of 10.9% to 11.9%.

We expect adjusted EPS in the range of $2 52 to $2 60 per share up 30.

Our previous guidance range.

We expect adjusted EBITDA in the range of $3.95 billion to 4.05 billion up $250 million from our previous guidance range.

We also expect our tax rate to be in the range of 23% to 24% compared to 25% previously.

I will now turn the call back over to the back for some closing remarks. Thank you Sharon. In summary, I would like to reinforce a few messages.

Thank you Sharon.

In summary, I would like to reinforce a few messages.

Our Omnichannel strategy is working with our customers, we're adding customers to our franchise, they're spending more with us and then engaging in more ways with us.

We continue to gain market share in dollars and units and our trends improved with each successive periods in the quarter and especially around the holidays. Our digital initiatives continued to drive engagement and growth.

Our digital initiatives continued to drive engagement and growth.

We remain focused on elevating service quality and speed.

Our productivity initiatives are delivering strengthening the middle of our P&L.

We're also navigating the uncertainties of the times inflation, product supply, neighbourhood challenges to name a few with agility and creativity.

Our strong performance year to date, and continuing positive trends give us the confidence to raise our full year 2021 outlook.

For the IV sales adjusted EBITDA and EPS.

While we celebrate progress we remind ourselves that we are still in the early innings of our transformation with significantly more potential to capture.

Finally, none of this would be possible without the efforts of our 285000 associates, who take care of our customers and the communities we serve day in and day out.

And day out.

I want to thank each and every one of them for their contributions to our ongoing success, we will now take your questions.

Thank you at this time, we'll be conducting a question and answer session.

To ask a question today. Please press star one on your telephone keypad.

And the confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue.

You May press star two if you'd like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment please while we poll for questions.

Yeah.

Thank you.

Our first question is coming from the line of Simeon Gutman with Morgan Stanley. Please proceed with your questions.

Hey, everyone. Good morning.

Hi, Sharon how are you doing? Good.

Hey, My first question is on inflation. I guess just straight housekeeping. So can you talk about product cost inflation or retail price inflation to the customer where is it and how is it trending sequentially? And I'm trying to figure out what the benefit could have been during the quarter.

I guess just straight housekeeping. So can you talk about product cost inflation or retail price inflation to the customer where is it and how is it trending sequentially and I'm trying to figure out what the benefit could have been during the quarter.

Thank you Simeon, I'm going to turn that over to the back.

So the CPI inflation was around 2% in the quarter ours was about 3% on cost okay for the quarter. And as I've said earlier, we expect inflation to be higher as we go through the year, but we expect it still to be in the 3% to 5% range, which in our opinion is extremely manageable and you're seeing that come through at least this quarter we just delivered so we feel good that we can manage it through both what the customer is able to, we have a strong customer so with that backdrop and what we have going in productivity, we are able to manage that and not be enel.

And.

As I've said earlier, we expect inflation to be higher as we go through the year, but we expect it still to be in the 3% to 5% range, which in our opinion is extremely manageable and youre seeing that come through at least the.

This quarter, we just delivered so we feel good that we can manage it through both what the customer is able to we have a strong customer so with that backdrop and what we have going in productivity, we are able to manage that and not be enel.

Got it. Okay. That's helpful. My next question I wanted to ask Sharon about the phrase table stakes, I think you remember it was mentioned a lot at Bestbuy and I think it was related to pricing and making sure prices were at parity to large competitors. And I know we've talked about this with Albertsons in the past, but I'm curious Sharon your own perception of the customer of Albertsons and in the industry. So far what what do you think or where should pricing be where should you operate? I'm curious if you have a view, yet like where would it make sense, where it wouldn't it make sense to level the playing field against other competitors?

In the past, but I'm curious Sharon your own perception of the customer of Albertsons and in the industry. So far what what do you think or where should pricing be where should you operate I'm curious if you have a view, yet like where where would it make sense, where it wouldn't it make sense to level the playing field against other competitors.

Yes, for me and thank you for that I think I'll talk first about where we have been with pricing and then I will follow up.

Talk first about where we have been with pricing and then I will follow up with.

With my view as it relates to Albertsons in that comparison, you spoke to so Vivek why don't you take the first part and I'll take the second? Simeon, I just wanted to be sure that reinforce our approach to pricing, but the first thing we look at is are we gaining market share in dollars and units because to me gaining market share units.

It gives us a good indication that the value we are providing our customer across the mix of our portfolio as a fresh portfolio, we have our own brand portfolio and the branded portfolio resonates. And so that's the first thing. The second principle on pricing I want to reinforce again is that we've taken to scrub the surgical approach to it.

Every single quarter, you should know that we are investing in pricing and we invested in them.

By price area in specific markets and again with the outcome that we care about which is growth and market share gains in dollars a unit. So please keep that philosophy and then Sharon.

Yeah. So Simeon I would say that interestingly enough there are great similarity.

To what we were doing in my previous life and I would say overall the company has a very surgical approach to pricing and that's actually not new.

We are definitely building capabilities in this area I would say that they have moved their cases abilities in this area are materially over the last 12 months.

And when I look at that.

Lightning Rod products, we might call them something different in the grocery space, but there are products that we offer in our store that mentally customers are consistently benchmarking.

And to the extent that we see that of course, we are going to be reacting.

Because that is what is good for our customer.

So it is different in every category, we have a much more expansive number of products that we offer.

And I would say that you will continue to see us in that.

In surgical way into pricing over time, where it makes sense to do it.

Okay, great. Thanks, nice quarter, everyone take care.

Thank you Simeon.

Our next question is coming from the line of Edward Kelly with Wells Fargo. Please proceed.

Hi, good morning, everyone.

I guess I wanted to start with just a follow up and then I had a bigger picture question, but.

Just on the inflation front you mentioned last quarter, you know sort of 3% to 4% being you know like a good number for the business today.

You mentioned last quarter, you know sort of 3% to 4% being you know like a good number for the business today.

Today, you said sort of three to five.

PPI is running much higher than that I mean, CPI is kind of closer to the high end I'm just kind of curious sort of taking a step back.

Can you just provide a bit more color on sort of how you're thinking about this? In terms of like how you manage it strategically. What your competitors are doing?

In terms of like how you manage it strategically what your competitors are doing.

And how we should be thinking about the gross margin in the back half of the year against that backdrop.

And I'll, let Vivek I'll take that.

Yeah. So let me start with the gross margin question here, because that's ultimately what we're trying to manage through it the top we want the topline growth and we want to make sure that it comes with a healthy gross margin.

Always maintain the faster.

In our company, we we obsess about this notion of gross margin tailwind.

And gross margin tailwind come from better mixed management, better shrink management, smarter promotions.

Light chain benefits in cost of goods benefits and those first three have been programs that we've been doing for a while now and the last two as we talked about earlier, we are going to see more and more benefits from that towards the back half of the year. So from the management for the gross margin to the P&L, while we can't predict what's going to happen with inflation, we certainly are prepared.

<unk> programs that we've been doing for a while now and the last two as we talked about earlier, we are going to see more and more benefits from that towards the back half of the year. So from the manage for the gross margin to the P&L, while we can't predict what's going to happen with inflation, we certainly are prepared.

With what we can do within with what's in our control. So think of it that way now secondly, with my three to five.

To me that the CPI projections came up I think it's gone up to 3.5 for the full year. So I expected I expect that it will continue to increase a little bit over what we've seen through the rest of the balance of this year and maybe the first part of next year, but it's still in my opinion it very much in the manageable around for a country like ours.

Especially with the consumer with the backdrop, we're seeing with the consumer the last thing I'll leave you with as you can see that a big part of the inflation, it's proteins and protein inflation tends to be more cyclical. So I suspect that some of that will come back a protein inflation and then you'll see different parts of proteins, So and it's a very manageable part of the business, especially when we have butchers than a stool, who can manage and give different choices for consumers. So that's how we manage the protein inflation. So consumers can always have something that they pick up to meet their budget.

Part of the business, especially when we have butchers than a stool, who can manage it give different choices for consumers. So that's how we manage the protein inflation. So consumers can always have something that they pick up to meet their budget.

Great. That's helpful. And then I just wanted to follow up related to the broader category of investments, so you're ramping investment in the business and in digital transformation and I'm curious is this changing at all with Sharon joining? What I mean by that is you know either in urgency or the size of the spend. Kind of curious Sharon is that how you think about like the position of the company stores? Or technology or supply chain, and how that could impact areas like Capex going forward? We have seen companies sort of ramp Capex into transformation, so I'm kind of curious as to how that may apply here.

The broader category of investments, so youre ramping investment in the business and in digital transformation and I'm curious is is this changing at all with Sharon joining what I mean by that is you know either in urgency or the size of the spend.

Kind of curious Sharon is that how you think about like the position of the company stores or.

Or technology or supply chain, and how that could impact areas like capex.

Going forward, we have seen companies sort of ramp capex and.

The transformation, so I'm kind of curious as to how that may apply here.

And I think that they have had a very disciplined strategy around the capital investments that they are currently doing to the extent that we could accelerate those investments we would. And from my perspective, these investments create gradual and incremental returns over time.

And from my perspective, these investments create gradual and incremental returns over time.

And the early stages of these kinds of transformation start with having to build the foundation.

Where the company is now is very much on getting out of the system that are old enough to drink and vote in most states and actually putting in platforms that they can build on quickly right and so this is a story that you hear from every large retailer.

Hmm.

Who have legacy systems. So.

They have been working on that for the last 18 months 24 months since <unk> joined the company we are in the process in the lytic behind these investments and the work to determine direction. It's very well on its way on many of these projects and now it's the execution that needs to happen. Rest assured that our goal is going to be to accelerate The pace at which we are rolling this out one of the key things we had to do was

For the last 18 months 24 months since <unk> joined the company we are in the process be in there.

Lytic behind the investments and the work to determine direction.

Very well on its way on many of these projects and Alex the execution that needs to happen rest assured that our goal is going to be to accelerate.

The pace at which we are rolling this out one of the key things we.

Patrick do you want to get ourselves into the cloud and as you know that is a significant undertaking and the company is making great progress on that.

All have a ways to go but we are making very good progress in that space, that's being able to move much faster in the future. So the.

Your question was how do I feel about it I feel the discipline around it and the strategic discipline around it has been excellent I think there is always the opportunity to accelerate which is something that I mentioned in my prepared remarks that I'm very interested in doing both on the technology side and on the supply chain side.

And as we look forward and we get into our guidance for 2022. This has been a question that I have received numerous times from many of you in the private meetings before our call today and I will be providing some additional color. When we go into 2022 as we get.

Clear picture of the 2022 capital spending expectations and budget, but as you know they have taken on the up.

I feel very confident that we will be able to execute against the initiatives that they had originally laid out.

Great. Thank you.

Thank you.

Our next question is from the line of John I come back home with Guggenheim. Please proceed with your question.

Hey, guys I wanted to start with Omnichannel households, right.

So up Forex.

I would imagine that's still less than 5%.

Of your total households is that fair.

When you think about maybe the next two years.

Can you double again.

You know that the number of omnichannel households over that time period.

<unk> and.

What do you think drives that.

Obviously organically just having capabilities some of that but more isn't really your outreach.

Marketing wise right that drives that are that growth from here.

I believe that's it that take that Hey, John Good morning, John.

We are we are we are.

Below our competitors in terms of overall omnichannel mix of the business and we've said that before and we continue to grow that we're excited about the growth rate, but we're also excited about the quality and the speed at which we're providing right. So your question I do think we can continue to increase it at the same pace if not more and there is.

A couple of things one is just making sure we are covering the entire market a great example, Jonathan.

When we opened up two hour delivery markets, we see even more incremental growth right people up to speed.

Our coverage is in the closer to say, 60% of the market and we're going to continue to grow that so often last for years to come.

Giving customers more choices on drive up and go three minute three minutes.

Minutes service when you pull up to the parking lot. We wanted to make sure. We can give you more speed in delivery and more choices and delivery and I think that those those fundamentals.

We opened it up continues to increase the number of Omnichannel customers, we get you know.

We haven't we haven't drilled on a big marketing Blitz or anything because we see a lot of customers coming to our stores and we just couldn't.

Put them at that point, they see the availability of they start engaging in it.

And John I would add to that.

That over time this past year, we have been adding capability.

Our customers were buying online with has been upgraded materially again all of these initiatives that we're working on in the E. Commerce side of the business are gradual and incremental you implement that customers learn to use them. They see how much more efficient they are they have.

A better experience and then they use it more so we've really soft launched the majority of these were also making similar progress in the loyalty area, we've talked in the prepared.

Prepared comments about the fact that we are increasing our number of loyalty members and as we enhance the benefits and enhanced.

The efficiency and the experience the customer has in redeeming loyalty et cetera that will also be greatly helpful to advancing this.

And then maybe as a follow up right. So you know if we're going to I don't know if it'll.

Would be a doubling in omnichannel customers right, but certainly the demand is going to increase exponentially. So maybe talk to and I know the MFC is tie into this but it's broader than this.

Bringing the cost to pick.

I don't know if you guys look at cost of picking piece.

As opposed to an entire order, but cost to pick down.

And how much can you bring the cost to pick down by right.

You bring that down $25 30 per cent or possibly even more.

Yeah, John the Costa picked out there's two steps one is how do you become more and more efficient in the store and that's through technology and then in some of our stores. We have created what we call them wherever room. So that your fastest moving items could be even faster in a very small space.

That's right.

You're going to reach the physical limits and so our long term strategy will not be about picking everything from the stored on certain locations would have to do that but that's where the MFC cause it what I can tell you is this that we'd see the NFC is getting to a point.

We're getting to a point, where the cost to pick.

Becomes about the same as the labor costs that we have for an audit scope and so because of the productivity that gives you and at some point you start becoming indifferent to whether the audio was fixed.

Where somebody shop, the store or whether they shop at through the NFC. That's that's the ambition that converges. This thing opens up in a big way for us because you.

You kind of indifferent diagnoses are going to take a little bit wider John as we said couple of Emmis things, we couldnt get done right because of delays permitting takes a little longer construction takes a little longer in today's environment.

Thank you.

Our next question comes from the line of Karen short with Barclays. Please proceed with your question.

Hi, Thanks, very much so just a question regarding guidance so your comp guidance obviously.

Proved but when we look at the second half EBITDA dollars, they're kind of more or less in line with consensus. So I'm kind of wondering if you could give a little color. There I mean, you've obviously raised top line, but you didn't.

Really changed the second half EBITDA dollars and then tying into that you know you did say sales accelerated throughout the quarter, but the full year I D Guide implies a deceleration in the one in tier I D. So some color on that and then I had a bigger picture question.

Karen on the bigger view for the back half I'll, let you take that and then I'll take more of the detailed financial side of the question Karen.

Think of it as let's say, we've got about two five points of additional IV growth right. That's about let's say about 165 billion or so.

At a 50% flow through is it an additional $250 million for the year right. So that's all I.

Think of it as an and remember that the back half of the year is going to depend a lot more we're getting a lot more of a productivity. So that's how we would frame at least the model for how we think about the full year.

Okay, and then Karen when you look at the back half if you do the math basically you're in the back half at the midpoint of it somewhere around flat.

So obviously that will flow through at that Jeff described.

And I would say this as we look at the back half like all of you like every report that I've read that many of you have written.

We are very thoughtful.

About whatever dynamics will result in the back half as it relates to the stimulus changes that will be upon us, which some have already happened. However, I will point out there's been some new ones.

You know we went from being no increases.

Increases.

Throughout the first part of the year and now they are paying out the childcare credits on a monthly basis and as we understand it.

We are.

The industry looks like it's getting a lot of that going into grocery and into everyday necessity. So we are thoughtful and about the back half and we will continue to.

Pushed the business, but as we see it right now I think we've played in a very balanced view of what the back half could look like on the comp side.

Okay. That's helpful and then Sharon in your comments you. Obviously, you said you had they were great similarities at Albertsons to kind of some of your former experiences but one comment you made was that you were taking I think a very surgical approach to pricing and have moved significantly in the last 12 months on that front.

Can you just update us on where you're at in terms of that and what is to be expected going forward.

As it relates to my comments on the pricing.

The company is building.

Very strong pricing team.

Federal resources have been added to that you know this is one of those investments that we continue to talk about on our strategic priority. So again. This is all about data Karen and as you think about the time the benefits of that are gradual and incremental I hate to keep.

But it is true for just about every one of the underlying projects and the strategic priorities that albertsons.

So as we think about pricing.

Again, what I said is the company has always been known for its deals.

The price that you see customers are getting special pricing through loyalty. They are getting special pricing deals and actually we have data that would tell us that people come to us for our deals.

So it is interesting.

You see how well the company is managing that at this point no do I think we need to go further.

And there's no one here it doesn't stake that you have to keep them and.

And keep pace with what others are doing in the industry. So I feel like we will continue to see benefit in pricing and I think we will be looking at the gap like we always have been looking at them and where we believe it is important and it will create more.

This with our customers, we will be adjusting that pricing, but I, just don't think that Mike.

Simeon said earlier that this year.

Yes.

A lot like best buy I think it is it in the pricing arena.

And at that time, we did match price, but there were many products that you can't match.

And that is always the case, so happy to have some further conversation as.

As we talked about this over time, but I feel very confident that we are building a much stronger pricing capability in the company and we will see benefit from that.

Kevin if I can add to that there's a big.

Can we talk you talked some some time a bogo promotion tools that we are launching now that is nationally all our promotions are going through that too.

And while we are doing less promotions. We're also doing a lot. There are a lot smarter with our promotions, we know which ones to do drive traffic, which wants to do to drive margins et cetera, and then a lot of that is also going to digital so from a promotion standpoint. We are so far ahead of where we were a couple of years ago from a data and technology capabilities.

Do it and that's that's the principle, we're going to continue to go down the other thing we're doing when we talk with these win win Joseph surgical is that in these different pricing because we also had just price everyday pricing and we do that very very it every quarter theres. Some some parts of our <unk>.

Some markets.

Franchise.

Speaking on an everyday basis, that's the combination that we could see the players are getting better and better at it because we have the data and the tools to do it.

Great. Thank you very much that was very helpful.

Our next question is coming from the line of Ken Goldman with J P. Morgan. Please proceed with your question.

Hi, good morning, Thanks I'm.

Sharon you mentioned that one of your priorities right now is working on the productivity agenda.

We've seen overall for the grocery sector margins declined for decades now so.

So I'm curious when you think about productivity.

Are you thinking about the net effect potentially being that margins over the very long term could reverse course and start to rise over time, whereas the idea you really just need more tools. So that you know.

But the headwinds just arent or offset partially a little bit better I'm, just trying to get a better sense of how you view. This because I think there's a belief out there overall that margins will continue to decline forever in this industry and I'm just not sure how you see that.

So that had made some comments about this in the last conference call I'll, let Doug take that first and then I'll give you my view, Yeah, Ken Hey, good morning, Ken.

Uh huh.

Oh no.

Our approach here is reborn we wanted to make sure. We don't grow this business simply by expanding gross margins. We've won favorably and gross margins, but we always wanted to have room for reinvestment or for growth. So that's number one number two.

You can speak about the industry, but I wanted to speak about that.

We've got plenty of room in the middle of the P&L to drive more and more productivity why is that good because we are yes, we went through the.

Greater than the past, but we haven't yet.

Fully operate with scale benefits and a lot of the initiatives that we're driving are driven by improving leveraging initiatives that would get us.

Get us better cost because I'm scared benefits, we haven't implemented all of the technologies like many others had that drives productivity benefits. So in the middle of the P&L youre seeing our productivity being driven by initiatives frankly that are not new to the sector, but new to us which gives us more flow through in the middle of the P&L.

So but think of that that philosophy.

So it's managing the gross margin through payer wins and investments. So that we are driving driving customers back to us and engaging more with customers and driving the top line and a set of technology and skill based initiatives that improve the middle of the P&L that end up with margins right. So.

If we if we can keep that engine going which we think we can we've continued normally deliver growth with healthy margins.

And Ken I would just add to that too.

<unk> said that there are other ways as well that we think are going to help offset some of those cost pressures I first and foremost want to say that there is no doubt in my mind that there will continue to be cost pressures on all of retail.

Grocery.

Consumer electronics pick one home furnishings. It doesn't matter there would be cost pressure. There is also the incremental cost of adding these online businesses, which were all aware of.

To combat that first of all.

Growth has to be the foundation of the strategy.

And we are making great strides and continuing to gain market share and it is a focus of the organization to gain market share and the fact that on a two year basis, we stated it on.

Both metrics, we are gaining on dollars and were getting our units. The second thing that we have that other retailers in the states have already taken advantage of is the penetration of owned brands. We sell in the IPO can you even go back to the IPO, we talked about the fact that we have an increased opportunity.

As for our penetration in brands, we have not yet.

You mentioned, a 25, 2% penetration today.

We still have significant opportunity there and we will continue to capitalize on that another area that we have the opportunity to create a tailwind, whereas offsets to some of the pressure is going to be in the midst of Fracs. We continued to talk about the fact that we are.

Growing faster in fresh that we are in the center store that is giving us a margin benefit.

And we will continue to grow in that area. Because we believe that this is one of the greatest things that we can do for our customers is to create an incredible fresh experience, but it also has a margin benefit from a mix point of view because those are just a few things I would add to what Vivek said that will give us some.

Tailwind to help offset the cost pressure that we would all agree is certainly coming.

Great. Thanks very much.

Thanks, Ken.

Our next question is from the line of Polish weight with Citi. Please proceed with your question.

Hey, guys. Thanks.

Curious about the categories, where you're seeing the highest levels of inflation and Vivek I think maybe you mentioned protein earlier and how you've chosen to pass through or not pass through those higher prices to the customer what has been the customer reaction in terms of elasticity of demand and how does that.

Compare it to what you expected.

Okay.

Paul You know, let me start with this.

We have not seen a material change in customer behavior.

I think it speaks to the strength of the cost of them.

It speaks to the fact that there in my opinion still consuming a lot at home.

They're enjoying cooking and so on so we're seeing those trends stake and in fact in the research we are doing with our car shoppers, we don't see that changing dramatically, we don't see their intense changing dramatically over the next several weeks and months.

So that's number one number two remember we are always optimizing for a basket and that's that's important to keep in mind, because you can see the protein inflation going up and so but we're always managing for two things. One is what's the what's the right way to past inflation. So we get the we make the basket affordable and yet.

The gross margins that we want the second thing we do is manage it locally.

And that's so that's something we can do with our model because we've got the the divisions that no water, Mississippi can bear market versus the competition. They have so in those two dimensions, we're able to manage that pass through if I can call. It a very very locally.

That's the combination that is giving us the ability to tell about the gross margin.

Without compromising the status.

That's helpful.

Yep. Thank you and then just another follow up on.

On the SG&A front can you quantify some of the year over year changes in <unk>.

Of which where the which we're moving the dial and I'm also kind of curious about the productivity initiatives, where do you stand in that $1 5 billion by 'twenty two how is that progressing relative to your plan. Thanks.

Yeah, So why don't I take that one Paul on the SG&A and the increase there there's a couple of dynamics during the quarter.

We discussed in the press release. The first one was that we have the reopening of many of our fresh departments Deli bakery prepared foods that creates a mix difference within our stores and the labor hours that of course to go along with that so that was one of the big drivers and one of the largest drivers.

The second area that we saw increases in the market wage rate well, we do have union contracts across the majority of our employee base.

We still have annual increases that come along into those contracts and then of course I don't have to describe for you. The wage pressures that you would see in any.

And we can start with stores that we can work our way all the way through the corporate headquarters we have wage pressure in virtually every area.

And the company like every other retailer we also have a higher stock based compensation this quarter.

Based on our credit that flowed through the P&L last year, but in the order of magnitude. They are in the press release in the order of magnitude.

Got it thanks, and then just that 1.5 billion.

Yeah.

We have not disclosed our progress against that however, we are progressing as you would expect them to progress and we continue to be committed to delivering on that promise.

Thank you guys. Good luck.

Thank you. Our next question is coming from the line of <unk> Parikh with Oppenheimer. Please proceed with your questions.

Good morning, Thanks for taking my question I wanted to follow up on the gross margin line I was wondering if you could provide more color on puts and takes you see on the balance of the year I think last quarter. You guys indicated you could be close to flat with the prior year. So I just wanted to get a sense of what your updated expectation is for the full year.

Sit back do you want to talk about the back half gross margin.

Sure I think so.

The way to think of it as some of the initiatives that are going to help us in the back half of the year and gross margin. In addition to the things we've talked about before it makes shrinking promotions the owned brand penetration and so on is is the new flow through coming from supply chain benefits and the new flow through from coming from cost of goods reduction.

Acreage both of them are leveraging us scared when I talked about those initiatives earlier. So we feel good about the overall gross margin tailwind that we have coming with us.

We continue to use that appropriately to drive growth and where we need to make investments. So no there should be no fundamental change to the thinking on gross margins for precious metals.

And we would be great.

We don't guide gross Martin, we only guide adjusted EBITDA.

Arthur.

Okay, Great and then maybe just one follow up just on the supply chain. Just curious where you guys are on the out of stocks auto stock front right now.

Yeah. So let me speak to that he was just in a meeting on it yeah.

I'm just surprised that you're still talking about the stuff that we have out of stocks, but the fact is it's like it's like whack a mole refresh theirs.

There are some things out of stock in the store, but so let's talk about how we manage it.

We give customers alternatives right. If you come in you may not get exactly what you want when you want it but you might get an alternative and if your covenant holiday you will probably find it.

And so none of this comes down to execution and this comes down to local execution finding ways to make sure that the stores supply finding ways to make sure that the stuff that's not in the backroom out at the front.

And that's where I am proud of what the teams are doing just to be that much a little bit better than others and what's on the shelf.

And I'll just add to that Paul that.

For the next.

Three three months.

Fourth quarter holiday.

Accidents that you've seen or that are being taken by many of the largest retailers.

We have been all over there and have a list of probably 25 things that we are approaching differently. This year than we have in the past in order to ensure that we offer our customers the best in stocks we can.

Okay.

Great. Thank you.

Our next question comes from the line of Scott <unk> with Arc five capital. Please proceed with your questions.

Hey, guys. Thanks for taking my questions. So I wanted to talk about something a little bit more short term, which Sharon I think you always had the reputation of being pretty conservative on the guidance.

Is that the philosophy, we're going to bring to Albertsons should we assume kind of a continuation of that.

Yes, there would be no question that I believe that especially in the environment that we're operating in today that that would be appropriate.

I couldn't affirmed more strongly that I believe that is a good strategy.

Okay great.

You know I know, it's a little early to think about 'twenty, two but we get a lot of questions on this and I guess you don't.

As you think about it is it could it be possible to grow earnings next year.

To a degree or is that something thats going to be just really hard given the cost pressures on the business.

The union contracts and labor and other things going on.

Yeah, Scott, we will not be talking about 2022 until we get closer to the end of this year. There is so much learning that needs to happen with the changes in the consumer and what quote post COVID-19. There is never going to be a post COVID-19, but the next.

Chapter.

Where that goes so when we get into the fourth quarter and we look at next year, we'll try to give you a lot more color on that.

But I think this needs to unfold before we start talking about 2022.

Totally thing I would add Scott is that remember cost because cost can things are controllable.

Can work that with productivity initiatives I think the biggest unknown as Sharon pointed out it whereas the consumer how is consumer behavior is going to change and as we've all seen I don't know if we predicted what's happening now.

Perfect and then if I could slip one last one in just the philosophy. That's a is it gonna be a change what's the philosophy on capital efficiency and ROI see them given that we are going into an investment period, a little bit with the company it sounds like.

Further investments yeah.

Yeah.

I would say that I think it is the philosophy and discipline.

But it is a philosophy of do it as fast as you can time is not your friend and philosophically that is very much how we will be moving forward.

We have a lot of opportunity. The bank mentioned earlier, we have brought together a lot of company and they've done a great job of getting them solidified onto us.

A similar platform common platform, but as we move forward, we still have opportunities and better buying you know we just consolidated some of that so we have significant opportunities to find a way other retailers don't have in their tailwind. So I think yes.

Yes, the diligence around those investments will be high and we will continue to accelerate to the extent we can over the next 12 to 24 months.

Okay, but we're going to run over time by just a little bit we'll take three more questions operator, but if you could keep it to one question a piece we really appreciate it.

Thank you. Your next question will come in from the line of Robbie Holmes with Bank of America.

Oh, Hey, Thanks, Hi, Hi, Vivek and Sharon.

Okay for my one question.

With the I think the guidance implies kind of similar to lower <unk> sales in the back half and what I was hoping can you give a little more color on sort of the traffic versus transaction size assumptions in that and maybe.

Peak to what Youre seeing or you see.

Seeing consolidation of trips remained similar or is that dropping off I'm, just you know when that customer behavior assumption.

What do you think is staying the same versus changing especially on that size of the transaction versus visits to the stores.

Yeah Ravi.

Backing out but have you talked about Q1, we have seen that there was store traffic was growing up a loss we saw digital traffic while it was higher the rate was coming down.

What's interesting is that over the last several periods here a.

Traffic seems to have stabilized in the stores. So we are seeing healthy stable traffic in the store and we've seen a pick up again in the digital traffic. So.

About three three weeks into this quarter, we started seeing a pickup in digital traffic and we've just launched a new a new app.

And we've started this fastest service and so on so it seems that that's been tough to go up so.

I'm predicting that to me is that we're going to see some stability, although store traffic as people started to get to a new pattern over here I don't know how Thanksgiving changes that property, but I hope that gives you. Some color that's how we've thought about the rest of the year.

That's great. Thanks, so much.

Okay.

Our next question is from the line of Michael My tiny with Evercore ISI. Please proceed with your question.

Hey, Thanks for taking the question just wanted to follow up if I could quickly to sit back and Sharon on the competitive environment and what you're seeing in terms of promotions throughout the quarter and then obviously to start this quarter and into year end.

Yeah for that yeah pretty stable, but you're not seeing the full.

Fundamental change you know I think everybody.

My sense is all the large players are doing more digital promotions doing things, we're doing by being smarter about promotions.

And then we also have supply challenges right. So we're not seeing any material change on the promotional environment.

Yeah.

Thank you.

Our next question comes from the line of Chuck Cerankosky with Northcoast Research. Please proceed with your question.

Good morning, everyone great quarter.

Chuck.

If.

If you could comment a little bit on how your prepared foods business evolved during the quarter as some of these new Oh excuse me the old sections of fresh reopened.

And also your progress in meal solutions. Please.

Yes Chuck.

We've been very cautious as we brought those back in and we saw a different take rates at different markets on salad bars talk bars and such and.

The general sense I guess now is that customers are back on the fresh side of the store on the on the self service side of the store.

And certainly you can see that most markets and then on the maintenance program. We are excited about what we're doing it's a very difficult thing to pull off to deliver develop the music store manage and keep the shrink down yet keep the offer really fresh.

A difficult thing to do it.

I think that the team seems to crack the code on that and we've launched it about a full market has already allowed us to continue to drive that through <unk>.

Chuck the Crazy thing is that the biggest challenge there.

Equipment.

Because like everything else that is constrained and how quickly you could get it.

Alright, thank you.

Okay. Thank you everyone I'm, sorry, we weren't able to get to everyone today, but we ran a little bit over we appreciate your interest Cody and I will be available for the dollars per day for a questions insurance is going to join us on the follow up call. So thank you very much and well talk with you soon bye bye.

Thank you. Thank you all.

This concludes today's conference you may disconnect your lines at this time and thank you for your participation.

Q2 2021 Albertsons Companies Inc Earnings Call

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