Operator: Thank you for standing by. Welcome to the Albertsons Companies First Quarter 2021 Earnings Conference Call. [Operator Instructions] This call is being recorded. [Operator Instructions]

I would now like to hand the call over to Melissa Plaisance, GVP, Treasurer and Investor Relations. Please go ahead. :

Melissa Plaisance: Good morning, and thank you for joining us for Albertsons Companies First Quarter 2021 Earnings Conference Call. With me today from the company are Vivek Sankaran, our President and CEO; and Bob Dimond, our CFO.

Today, Vivek will share insights into our first quarter results as well as review our progress against our strategic priorities. Bob will then provide the financial details of our first quarter as well as updated full year 2021 outlook before handing it back over to Vivek for some closing remarks. After management's comments, 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. These risks and uncertainties include those related to the COVID-19 pandemic.:

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

Vivek Sankaran: Thanks, Melissa. Good morning, everyone, and thanks for joining us today. We entered uncharted territory in Q1 with comparisons to last year's pandemic stock up period and the gradual reopening of various geographies as vaccination rates accelerated and COVID-related restrictions were lifted. In this dynamic environment, we remain focused on executing our strategy centered around deepening relationships with our customers and leveraging technology to run our business more efficiently and effectively. I am pleased to report that our results for the quarter exceeded our internal plans across all key metrics, increasing our confidence in the balance of this year.

Our ID sales grew 16.5% on a 2-year basis, and we continue to gain market share in food on a 1-year basis and in MULO, which includes most food, drug, mass, club, dollar and military on a 2-year basis. In addition, we achieved EBITDA of -- adjusted EBITDA of $1.3 billion and adjusted EPS of $0.89 a share ahead of our expectations. :

Against the backdrop of growth exceeding 200% in every quarter in fiscal '20, our digital initiatives continue to resonate with our customers. And we have retained the sales levels we achieved last year with digital sales virtually flat year-over-year in Q1, and a 2-year stacked ID sales growth of 276%. With all the options we have in place, we have achieved 95% customer coverage with eCommerce and retention has been strong. At the same time, we have seen a pickup in in-store transactions versus Q1 '20, and many of those incremental in-store shopping trips are focused on fresh. :

At the end of Q1 '21, we had 3.6x the number of omnichannel households than we had 2 years ago in '19. We've seen that as customers move into omnichannel, they also increased their spend in our stores with a net growth of 17% per household spend in the quarter and a total spend rate of 2x that of an exclusively in-store shopper. In fact, in Q1, with identified households, an average in-store-only shopper sales were down while the omnichannel customer sales were up year-over-year. We've grown our identified households by 8% year-over-year for the last 52 weeks, allowing us to better understand their needs so we can personalize our offerings for them and drive recurring and incremental spend. :

Membership in our just for U loyalty program continued to accelerate and was up over 18% year-over-year in Q1 '21 to 26.7 million members. We also increased the number of actively engaged customers by almost 13%, and we have a 94% retention rate that engage just for U households. Remember that actively engaged customers spend 4x more with us. :

In summary, our strategy of building lasting relationships with customers through a combination of digital and in-store engagement is driving our top line. Overall, our strategy is focused on 4 priorities: in-store excellence, accelerating our digital and omnichannel capabilities, driving productivity and strengthening our talent and culture. In-store excellence is demonstrated through the one-stop shopping experience we continue to provide for our customers supported by the quality, variety and depth of our fresh and Own Brands offerings that give us a competitive advantage. In fresh, which has always been a strategic focus for us, we continue to see stickiness giving us confidence that our strategy is working. The fresh department sales growth outpaced center store by approximately 200 basis points on a 2-year basis, which each of our fresh categories ahead of pre-pandemic levels as customers continue to consume more meals at home. As our markets have opened up, we've seen customers shopping in our stores more often and continue to see fresh as a key driver for growth.

Our Own Brands portfolio also continues to appeal to our customers with strong sales driven by the introduction of new innovative products as well as our focus on Albertsons legacy divisions that were historically underpenetrated. Our Q1 sales penetration was 25.2%, up over 100 basis points from Q1 '20 when supply issues impacted sales. We continue to innovate launching 318 new items in Q1 '21, many of which were Signature farms bulk items, including trail mixes, various nuts and dried fruits, Open Nature almond butter and Signature select premium beef patties. We continue to expect to launch over 800 items this year. We're also proud of our Own Brands team that was named the Store Brand Magazine 2021 Game Changer as a private brand that revitalized the industry. :

We also continue to capitalize on demand for convenient and fresh meals as consumers come to us for food beyond the purchase of ingredients. We have begun the rollout of our ready meals, our ready-to-eat, ready-to-heat and ready-to-cook meals program and expect to be in approximately 500 stores by our fiscal year-end. Finally, we continue to invest in our stores. We opened 5 new stores and completed 33 upgraded and remodel projects during Q1 '21. :

Our second priority is the acceleration of our digital and omnichannel capabilities. Digital is an important growth driver for us as we strive to provide an area of convenient shopping experiences for our customers. We added a net 320 new DUG locations, Drive Up & Go locations, in Q1 '21, bringing our total to 1,740. And DUG sales grew 75% year-over-year. We now expect to have DUG in approximately 1,950 locations, representing approximately 98% coverage by the end of the second quarter. :

As part of our growth plans in digital, we also remain focused on delivering a superior customer experience as well as improving profitability. For example, we continue to achieve on-time tilling and delivery rates in excess of 95%, demonstrating consistent on-time delivery and DUG pickups. We began the rollout of our integrated loyalty and eCommerce app offerings of connected customer experience through a single interface. :

We launched a new San Jose [ Bay Area ] MFC, and that plans for an additional 6 MFCs before the end of our fiscal year, bringing the total to 9 MFCs. We sped up delivery times while reducing delivery cost per order by expanding our third-party delivery store network while also adding DoorDash 1-hour delivery to our eCommerce options, which has been rolled out to 9 divisions so far. We also implemented our enhanced picking software at all DUG locations to help optimize and standardize picking processes, increasing picks per hour and enhancing order prioritization. And we improved customer service by migrating all support to one IT platform. :

Our third strategic priority is driving productivity to support reinvestment in the business and help offset inflation. We are making progress against our productivity agenda, and we exceeded our internal expectations in Q1. During the quarter, we made significant progress in labor efficiency, shrink, promotions optimization and indirect expense. We continue to expect to achieve $1.5 billion in gross savings by the end of fiscal '22. :

Our fourth priority is strengthening our talent and culture and 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 Jennifer Saenz, our new Chief Merchandising Officer, and are very proud of our store-level teams who are adapting well to a changing environment. Our pharmacy team also continues to come through for our communities. To date, they have administered 6 million COVID vaccine doses. In addition, during Q1, our Nourishing Neighbors fundraising drive raised approximately $9 million from our generous customers at our check stands, which was matched by the Albertsons Companies Foundation resulting in $18 million in funds to feed children and families this summer. :

As part of our ongoing focus on ESG, we recently announced that we are the first company in America to introduce a 100% zero-emission refrigerated grocery delivery truck. And we have been enhancing our supplier diversity program through new partnerships and an improved database and tracking tool. And in conjunction with our recently completed new materiality assessment, we're focused on quantifying our carbon reduction opportunities, baselining our food waste, plastic and packaging footprints and further developing goals and targets for DE&I and community stewardship. We expect to share our key focus areas and commitments later this year. :

And now I would like to ask Bob to cover the details of our first quarter financial results and outlook. :

Robert Dimond: Thanks, Vivek, and hello, everyone. I am pleased to provide details on our strong first quarter results as well as an update to our fiscal 2021 outlook. In many cases, I will make comparisons back to our first quarter of fiscal 2019 period to demonstrate the performance versus our pre-pandemic levels.

For the first quarter, total sales were $21.3 billion, up approximately 14% or $2.5 billion compared to the first quarter of fiscal 2019, which is primarily driven by our 16.5% 2-year stacked identical sales results. Our gross profit margin came in at 29.1% during the first quarter of 2021 compared to 29.8% in Q1 2020 and 28% in Q1 2019. Excluding the impact of fuel, our gross profit margin was up 10 basis points compared to Q1 of 2020, and increased over 90 basis points compared to Q1 2019. The increase compared to Q1 2019 is primarily driven by improvements in shrink expense, our productivity initiatives, sales leverage and improved pharmacy margins relating to administering COVID-19 vaccinations, partially offset by investments related to our growth in digital sales. :

Our SG&A as a percentage of sales, excluding fuel, increased 115 basis points year-over-year as we saw sales deleverage versus the period of significant heightened demand in the first quarter of last year. But importantly, on a 2-year basis, we decreased our SG&A as a percentage of sales by 75 basis points. :

COVID-19-related expenses during the quarter totaled approximately $130 million. Some of this was onetime in nature, including the write-off of some COVID-related inventory and supplies, so we expect these costs in future quarters will be lower. :

Interest expense was $153 million compared to $181 million in the first quarter a year ago. The reduction in interest expense is primarily driven by lower average interest rates due to our successful refinancing transactions during fiscal 2020 and our continued deleveraging. :

Adjusted EBITDA was $1.3 billion in the first quarter of 2021, representing compound annual growth of approximately 22% versus the first quarter of 2019. The growth in adjusted EBITDA versus the first quarter of 2019 represents strong flow-through of approximately 17%. Adjusted net income was $518 million or $0.89 per fully diluted share, representing compound annual growth of over 70% compared to Q1 2019. :

We ended Q1 with $2.2 billion in cash on the balance sheet and are pleased that this gives us flexibility to continue to invest in growth opportunities. :

Capital expenditures were approximately $513 million during the first quarter as we opened 5 stores, closed 5, completed 33 remodels and invested in our digital and technology platforms. We continue to expect our spend to be approximately $1.9 billion to $2 billion during fiscal 2021. During Q1, we also received upgrades from our debt rating agencies as Moody's upgraded us to BAA stable and S&P upgraded to BB stable. :

We ended the quarter with our net debt-to-adjusted EBITDA ratio at 1.5x on an LTM basis, consistent with the levels we exited the fourth quarter of fiscal 2020. :

Turning now to our updated outlook for fiscal year 2021. Given the outperformance in Q1 and recent trends, we have updated our guidance for fiscal '21. Some of the outperformance in Q1 is related to COVID vaccine revenue that was ahead of expectations. And this revenue source has begun to taper off as the pace of vaccinations slows. Nonetheless, our competitive advantages and the underlying stickiness of the business gained during the pandemic as well as the ability to pass along modest inflation and the continued consumer demand for premium items gives us confidence in the strength of the business for the balance of the year. :

We now expect identical sales on a 2-year stack basis to be in the range of approximately 11% to 12% compared to prior guidance of 9.5% to 11%. We expect adjusted EPS in the range of $2.20 to $2.30 per share, which represents a 2-year compounded annual growth of 47% at the midpoint of the range, up $0.25 from our prior guidance range. We expect adjusted EBITDA in the range of $3.7 billion to $3.8 billion, up $200 million from our previous guidance range and representing 2-year compound annual growth of approximately 16% at the midpoint of our range. :

In Q2 to date, we are seeing our core business sales on an average weekly dollar basis and market share gains continuing at similar levels to Q1. As a result of seasonality and the drop off in the pace of COVID-19 vaccinations administered, we believe the current consensus expectation for Q2 EBITDA margin is still appropriate. We continue to believe that our productivity initiatives and seasonality will drive stronger EBITDA margins in the back half of the year compared to Q2 as we noted on the year-end call. :

And now Vivek will provide some closing remarks. :

Vivek Sankaran: Thank you, Bob. Before we turn to Q&A, I want to share a few closing remarks. While it's hard to predict the impacts of COVID-19 on demand over the long term, we believe there are a few trends that will stick with us. First, we believe digital engagement with consumers in our sector will continue to increase. This provides us with an opportunity to gather more data and deliver a better, more personalized shopping experience for our customers. Second, even though we saw a step change in 2020, we believe consumers will increase their use of e-commerce solutions, especially pick up in store and rapid delivery. Particularly in our industry, consumers value speed and delivery, and we are committed to continuing to enhance speed by leveraging our great store locations. Lastly, we believe more remote work is here to stay. This means more meals at home, which will continue to benefit our business, particularly the demand for fresh ingredients and meals.

Albertsons Companies is well positioned to capitalize on these trends given our unique competitive advantages. And as we go forward, we'll remain focused on investing in technology to amplify our strengths and become a faster and more efficient business to better serve our customers and drive EBITDA flow-through in our P&L. :

With this as a backdrop, let me also share some insights on recent trends in our performance. Despite business reopening and people resuming travel, our sales momentum continues with growth in market share, and we are very focused on continuing these trends on market share. When looking at our average weekly sales dollars, sales in Q2 are continuing at the same levels as in Q1. We are seeing continued strength in sales of items that were elevated throughout the pandemic such as meat, seafood, produce and high-end wines, providing evidence that some important food and beverage categories remain shifted to food at home. While we are seeing higher cost inflation in some categories, we saw modest inflation during Q1, and we were generally successful in passing it through as the competitive environment has remained rational. And we continue to see households upgrading to more quality and premium products indicating that the consumer is still strong. :

Overall, we are confident in our ability to continue to produce strong results. I want to extend my thanks to our entire team of approximately 290,000 associates who are continuing to take care of our customers and communities this quarter as well as throughout the pandemic. We will now take your questions. :

Operator: [Operator Instructions] The first question is from John Heinbockel from Guggenheim Partners.

John Heinbockel: Vivek, I'm going to do 2 quick ones here. One, now that you've got another, I don't know, 20 weeks under your belt this year, what's your thought regarding the secular algo, right? And how that may have changed because of COVID? And then secondly, with all the capital, right, the cash and free cash flow you've got, what would you like to invest in strategically? And I'm not talking about dividend or stuff like that, but more either organic or M&A that you think would be additive to the business. Is there anything like that out there?

[Technical Difficulty] :

Vivek Sankaran: John and everybody, sorry about these glitches. Sorry about that, guys. John, let me answer your question first. On a secular trend basis, I'll point to a few things. One, a very healthy consumer, okay? We are still seeing no trade down. They're still buying many discretionary items in our store, traded on up meat, wines, et cetera. Second, it's clear to us that they're eating a lot more at home. Our fresh sales are higher than the rest of the store, and -- so that continues.

I think partly driven by the fact that people are still working from home, and I've always maintained a point of view that, that will continue into the future. And also partly that people are more comfortable cooking at home. Our eCommerce continues to be strong. You know what, if I was to dissect that a little bit, you'll see that our eCommerce transactions are still higher over last year. But the baskets are smaller, as you would expect, because people bought everything and anything they could last year on eCommerce. But what's very interesting is there's -- people are coming back to the store. The traffic to the store has gone up significantly, and it went up week-over-week-over-week through the last quarter, right? So I mean, those are a few things I'll say. And just a lot more digital engagement, which we love, John, because now we can get more data and we can personalize and do the right things for them. :

On cash, our priorities will still be the same, it's about growth. And we will first focus on organic growth. We'll continue to invest in our fleet. I think it's clear to us that stores still matter and we'll continue to do that. And we're going to put a lot of energy into digital growth, and that is both the software side and the hardware side. We're going to roll out more MFCs this year, and we see a lot of promise there, and we'll continue to do that. And we'll be opportunistic on M&As. And the stronger we are, the better the returns will be on M&A as it's turning out for us and things are [ about to change ]. :

Operator: The next question is from Paul Lejuez of Citibank.

Paul Lejuez: Vivek, towards the end of your prepared remarks, I think you had a couple of comments about inflation. Just wondering if you could dig in a little bit deeper in terms of what you're seeing on the cost of goods side of that inflation equation? And how do you see that trending over the balance of the year? And then related to that, how does that change the way you think about pricing on national brands versus what you might do with your private label product pricing?

Vivek Sankaran: Do you want to touch on inflation, Bob, and I'll do the pricing piece.

Robert Dimond: You bet. Paul, what we saw in product cost inflation was somewhat modest, 1.5% to 1.7% during the quarter. And so we saw that, that was increasing slightly as the quarter continued, but still within a reasonable range.

Vivek Sankaran: Yes. And our outlook on that is that I think it might be slightly higher towards the back half of the year, Paul. But I've always maintained that if it continues to be in the 3% to 4% range, it's actually good for the business, especially with a strong consumer like I've indicated. This is something we can pass through and we get a lot of leverage when it gets into that range.

Now when it comes to pricing on Own Brands, look, we are -- our Own Brands penetration is up. That's a good sign. It helps us on gross margins. We were all worried, you were all worried whether the Own Brands going to decline, but it's coming back nicely. Our Own Brands branch pricing will always be -- you'll have 2 things, one is pricing to make it an opening price point and pricing on some of our products, which are destination products where we'll be a little more aggressive because we can compete well with the national brands. And we'll just track it with what's happening in the national brands. :

Operator: Our next question is from Karen Short with Barclays.

Karen Short: I just wanted to clarify a couple of things that you said. Bob, I think what you had said is that you were comfortable with the EBITDA margin for 2Q or consensus margin was appropriate for 2Q. So I just wanted -- looking at that consensus from what I can tell is a 5% EBITDA margin. So is that the right way to think about the delta between 1Q and 2Q? There's obviously some deleverage, but the delta on that change sequentially is what the contribution of the vaccines were to mostly to 1Q gross margins? I'm just trying to understand the magnitude of the vaccine components on 1Q?

Robert Dimond: Yes, great question, Karen. You've got part of it right there. Certainly, the vaccine income was a portion, but it's actually a slight -- the larger portion. If you go back 5 years kind of throughout 2020 out, you'll find there's a seasonality adjustment, if you will, or a difference from Q2 -- in Q2, going down 60 to 70 basis points that happens every year. And then that pops back up as you get into Q3 and Q4. So the bigger piece of that is just normal seasonality, a little bit on pharmacy and other items.

Vivek Sankaran: And we're accelerating DUG rollout. We're pulling it further up into Q2 because we think we can go faster and should go faster in it. So it's a combination of things there, Karen.

Robert Dimond: That's right.

Karen Short: Okay. And then I wanted to actually just go -- switching gears to the centralization of the supply chain. I guess I wanted to ask just broadly, how you weigh the risks -- risk and rewards of that effort? Because I guess, in kind of the history of centralization, it's always kind of been a short-term benefit, but longer term, it hasn't always worked. So I'm wondering if you could give a little color on that. And then is the vast majority of that $500 million, I'm assuming it is all a gross margin benefit to the extent that, that centralization is executed the way you hope.

Vivek Sankaran: Yes, there are 2 topics, 2 different initiatives that help with gross margins. And if you think about the second half of the year, Karen, we've always maintained that. More of our productivity is coming in the second half, it's because of these 2 new initiatives. The first one is around supply chain, which is optimization of our distribution centers, rethinking how the network of distribution centers and so on. The second one is by pooling our spend on major categories and buying it as one national company rather than buying these big CPG products as different divisions.

Now you're 100% right. And centralization, the notion of pure centralization has been short-lived. And you always get into the other side where people stop listening to what happens in the field. We've spent -- one -- we've done 2 things. One, we've pursued the dollars, and we are continuing to pursue the dollars. And think of that as one set of initiatives. We've spent equal or more time on thinking about how we do it, how we make sure we are able to leverage the local knowledge that people have. We have maintained the core of those teams in our markets so that they can provide local knowledge and insight. And we've added teams at the center so that they can start getting the leverage where we need to, right? :

And so -- and we've worked through every detail there, and we're very conscious of it. That are people on my team who have been through the other side. And so we know what we don't want to do. And so we're being cautious, but your caution is a good one, Karen. But to me, I'd rather do this and work it then be afraid to do it, and that's where we're going down this path. :

Operator: The next question is from Scott Mushkin with R5 Capital.

We'll move on to the next caller. The next caller is Edward Kelly with Wells Fargo. :

Edward Kelly: I wanted to go back to the gross margin. Your performance on a 2-year basis, up 90 basis points is obviously strong. Can you provide just a bit more color in terms of like unpacking that and the drivers of that? And then as we think about Q2, should we expect a similar trend? I mean the comparison is similar, you've started off the same way from an ID perspective it seems like. And then just bigger picture, if we were to take a step back, how do we think about the sustainability of this gross margin sort of post-pandemic versus pre-pandemic? And how much of this do you think ultimately fades?

Robert Dimond: Okay. I'll take the first half of it here. As far as the 90 basis point improvement relative to '19, it's really made up of several things here. We have had tremendous shrink improvement. In addition to that, we've also had several productivity initiatives, so that being one of them. But in addition to that, we've had some promotions efficiency improvements that have helped us out as well as we've talked a little bit already on the call about Own Brands. Our Own Brands mix has rebounded back up. And as you know, that has a higher gross margin to it. Our fresh mix, that also has been growing as well. And so all of those things kind of work together to support that 90 basis points.

Now as far as going forward, how we guided in our last conference call, as you might remember, is we said that we felt like that we would be directionally flat to the 2020 fiscal year overall gross margin, which implies that we'll be up to roughly 65 basis points that we were up in 2020 versus 2019 for the full year. It's not going to necessarily be a flat amount per quarter because last year was kind of a strange year, and there were -- some quarters are higher than others. So I would kind of -- if you're to pattern it off with anything, I'd pattern it off of adding that to 2019. :

Vivek Sankaran: And Ed, to me -- a lot of what Bob mentioned were operational things, shrink, et cetera. What I said earlier about supply chain and cost of goods also continues to support gross margin. We are always, always seeking tailwinds for gross margin, okay? The meals program, when done right in the store is accretive to gross margin. And so we keep seeking that. Now but I will tell you that our intent will never be to keep expanding the gross margin as the means to the bottom line, right? Because what it gives us is it gives us a chance to surgically keep investing in price and other things that we can do to drive growth for -- and get more volume through the P&L, which is always -- which clearly in our business gives us tremendous flow-through. So that's how we play it. You'll always find us seeking more ideas.

Edward Kelly: And just one quick follow-up for you on the $2 billion plus cash balance that you've got. You've talked about investment, but you've also been a cash flow positive company, right? Like you haven't -- you've been more than covering that need. How do we think about the real sort of like optionality around this cash balance, whether it's debt reduction, whether it's you have a sponsor that still owns a lot of stock? If there was something to do opportunistically there, would that interest you? You have bought stock in the past? I'm just kind of curious as to how we really think about this $2 billion and what happens with it.

Robert Dimond: Yes. Ed, good question, but we really do have our focus on investing it back in the business to drive sales. That's really it. We may do -- we had planned to pay down just a little bit of debt this year. So we'll use a little bit of that as one of our bonds comes due a little bit later on. We keep our eyes open for M&A opportunities, but that would be our priority.

Vivek Sankaran: Yes. And we will remain opportunistic, Ed. We are good at buying emerging companies. And as those opportunities come, we'll do it. But primarily now we're focused on driving the organic growth. We think there's a lot more potential in the transformation we're doing right now.

Operator: And the next question is from Scott Mushkin with R5 Capital.

Scott Mushkin: Let's try to do this again. Hopefully, you guys can hear me this time.

Vivek Sankaran: I can hear you, Scott.

Scott Mushkin: Okay. Perfect. I think maybe it was my phone, I don't know. Anyway, I wanted to ask a longer-term question around omnichannel, digital. And just really understanding 2 things. Number one, it seems like you guys are trying to pursue a much more asset-light model compared to some of your competitors, and I want to make sure my interpretation is correct there. Then the other thing I want to talk about or maybe you could answer is kind of keeping the store environment shoppable. I mean I was in a Walmart yesterday down in Houston. I think there was just fighting in the shelves with the pickers is difficult. So those are kind of 2 questions, and I have a follow-up.

Vivek Sankaran: Yes. Let me start with the second question first, right? Because our eCommerce business, I would say, I don't characterize it as asset-light, I think it begins with saying our greatest asset is the store. Full stop, right? And so we are like ducks paddling pretty hard every day. It's smooth on the top, but we are paddling very hard to run great stores. And it's simple for us. It's got to be full. It's got to be clean. The fresh has to be really fresh. We've got to offer the variety and we better have good service. And by the way, better manage the labor properly. And there's a group of us who are maniacal about doing that.

When you have that, it gives you a great base to build an eCommerce business. And our eCommerce business is built on those stores. And the reason I don't say it's asset-light, Scott, is that I do believe that there is room for MFCs and MFC growth, okay? The nice thing about the MFCs is it is assets, it's more assets, but it gives you optionality. You can go at a certain pace. You're not making any single bet. You're making many, many bets. And with every passing year, you're getting more new technology on the bet you're making. So we like that, that's the approach that we're taking. On the delivery side of it, yes, we are going -- we were asset-heavy and we are going asset-light, right? Because I don't believe the model of the milk run with the truck is a good idea for grocery. And so we are using much more of the point-to-point deliveries. So that's how we think about it. But everything rests on running great stores, which is always our #1 priority. :

Scott Mushkin: That's great. And then my follow-up is actually a little bit -- I think we're -- maybe Ed was going on this question, is that your stock sitting here, with my math, just under 5x EBITDA in 2022. That's really low, almost kind of -- almost getting to the stress levels. Is there anything from a management perspective that you think you guys can do to try to get more attention to what you're doing to kind of get that valuation up? Do you guys even think about it?

Robert Dimond: Thank you, Scott. It's -- and you -- there's about $11 billion pre-pandemic real estate value also embedded in this. So we think -- yes, we agree with you. We agree with you. And hopefully continue to put up quarters like this will make a difference.

Operator: The next question is from Ken Goldman with JPMorgan.

Kenneth Goldman: You mentioned that you were successful in passing along inflation of -- you're still well below that 3% to 4% range you said is still good for the business. A lot of the packaged food companies we cover though, they're facing more inflation than they expected even a couple of months ago. Now some of them are talking about seeking second rounds of pricing with customers. So I'm curious, what is your appetite for letting second rounds through in a general sense? It's -- historically, there's been a lot of pushback to that. But right now, elasticity is just not that powerful a driver, so maybe you're thinking about letting more through than usual. I just kind of wanted to get your sense for how you're dealing with some of your vendors coming back asking for more.

Vivek Sankaran: Yes. Ken, yes, let me put it this way. First, it's always on a case-by-case basis, okay? And I know that some of our CPG companies are facing challenges in labor, challenges in transportation, et cetera. We have our large Own Brands business. And because of that, we get tremendous transparency also to what's happening to cost. So we end up having good and constructive negotiations with our supplier partners. And where it is warranted and legitimate, we will pass it through. And when I say the 3% to 4%, recognize that, yes, we may have several CPGs who -- where there is a legitimate cost increase and requiring a price increase, and we'll do that. But it rallies that our entire portfolio goes up 3% to 4%. You're always something that is going down, especially when you have such a high fresh component.

And that's what happens. That's why you end up with this 3% to 4% despite you hearing the noise about inflation in many of the CPG companies coming together. All that said, I do expect it to be a little higher in the back half of this year. There's no question about it. I do expect it to be higher, but in the range that we feel comfortable passing through. :

Kenneth Goldman: Okay. That's helpful. And then a quick follow-up. Are there any signs that any of your major competitors are planning on stepping up discounting in the back half of the year? Are you pushing any of your major vendors to start spending back more in the stores? I know some of that is counterintuitive with the pricing that's going on, but just trying to get a sense of the environment you're seeing right now and what you're looking for there.

Vivek Sankaran: It's remarkably about the same as it was for the last -- I looked at it just recently, the index promotions and stuff. It's about been the same for the last several quarters -- last 2 or 3 quarters, Ken. I think you have 2. One is you talked about the elasticity. The other thing to keep in mind is supply. Those -- the types of things that you would tend to promote in football like a soda or beer or Gatorade and other things -- I mean, things are in tighter supply. So it's just going to be harder for us to do anything like that. So I think you're seeing the discipline in the marketplace.

Operator: The next question is from Kate McShane with Goldman Sachs.

Vivek Sankaran: Kate, we can't hear you.

Melissa Plaisance: Kate, why don't you dial back in, and we'll pick you up. Let's go to the next caller.

Operator: Certainly. The next caller is Simeon Gutman with Morgan Stanley.

Simeon Gutman: I hope you can hear me. Nice quarter.

Vivek Sankaran: Yes, we can hear you.

Simeon Gutman: Great. So my first question, I want to talk about the top line in the quarter. So the stacks look like they're accelerating. The industry is certainly not. So you're certainly taking share. Can you talk about how you look at the business? It looks like it's accelerating versus -- it accelerated in Q1. Can you break apart units in pricing and take out fuel and adjust for seasonality? And is that fair? Is it accelerating? Is it about the same versus the prior quarter?

And Vivek, you had this hypothesis pretty early on that some of the habits during COVID would hold. It looks like that's true so far. Why should that continue even as we moderate -- as we go back post-COVID, like why should that hypothesis still hold going forward? Are you seeing things that give you confidence in that now? :

Vivek Sankaran: Yes. Simeon, let me answer the second one, Bob can then come back to the first one. So let's go into what is driving the sustenance of that behavior. I always believe that the bigger impact of the lasting -- more lasting impact of the pandemic is the work from home, right? And so you're finding more and more companies going to a model where they say come 3 days to the office or 2 days to the office. But that really means 2 days at home or 1 day at home, and that's a substantial number. So I think you're going to see -- as long as that continues and we all get into a different mode of working, you're going to see more in-home consumption, especially breakfast and lunch, and that's substantial.

The second thing we're seeing, this one, I don't know how long it will hold, okay, which is people cooking more at home. And I'm seeing that only because you're seeing a lot more fresh sales than 2019, and it's higher on a relative basis to the rest of the store. That, I don't know, Simeon, how long it will last, but I can see that pattern going for at least a year. The real test will be what happens when schools open, what happens when colleges open in the fall, what happens when people start traveling more and so on, which is why in our outlook, you've seen that our sales are adjusted a little down for the second half. But the trends I'm seeing now are pretty positive. :

Robert Dimond: And then on the first item, Simeon, you really can't look at the ID rates very well, especially in the first quarter because things were really crazy a year ago as you know. But when we track -- we obviously track things on an average dollar basis, on a weekly basis, and we saw some very solid strength and momentum really throughout the quarter. So...

Vivek Sankaran: Consistent, right?

Robert Dimond: That's right. And as we said in our prepared remarks, we continue to see that into the second quarter much at the same level as we saw in the first quarter. So we're very optimistic on where sales are going.

Operator: The next caller is Kate McShane from Goldman Sachs.

Katharine McShane: Can you hear me?

Vivek Sankaran: Yes, Kate. Sorry about the technical stuff, but we can hear you well.

Katharine McShane: Okay. Good. No, no problem at all. I just wanted to follow up on the digital delivery piece, the third-party fulfillment. I just wondered, ultimately, what that looks like in terms of how many partners do ultimately have when it comes to third-party fulfillment? And what does it mean for profitability? And finally, just the last question related to that is just what does it mean when it comes to data and using these other third-party fulfillment marketplaces?

Vivek Sankaran: Yes. So Kate, let me split that into 2 buckets. One is recognize that the fastest-growing business for us is Drive Up & Go, and we're really excited about that, right? It is growing on top of last year, and it's growing faster than the expansion rate of our Drive Up stations. And in the Drive Up & Go, we have everything, right? We do the entire -- the service. There's a second part of the business where customers are ordering through us, and we are using a third-party to do the last mile. And that's purely more than anything an efficiency play because it allows for speed. You can get it done in a 2-hour delivery. And we believe in the notion of speed in eCommerce, right? So that's the second part.

Then the third part of the business is where we have a third-party who is getting the customer order and picking in the store and delivering it. And so that's -- and that part of the business, we are using multiple partners. And really, our philosophy there is that we're going to meet the customer where they want, right? And many of our customers -- most of our customers are shopping both. The best customers are shopping both online and in-store. And our stores are in great locations. So I think it works for everybody, including the third-party when we are shopping proximal to where the customer is living. So that works for us. :

And what we are doing is we are engaging more and more in the transparency around the data and in loyalty programs so that we continue to maintain that relationship and have the knowledge of what that customer is buying. So we'd look at it in 3 parts. And I just think at the end of the day, we'll focus on reaching that customer in many, many different ways. :

Operator: The next question is from Michael Montani with Evercore.

Michael Montani: Just wanted to ask, if I could, on the 10% ID sales decline and then 16.5% 2-year. If you all could share what the traffic and ticket split was? It did sound like traffic is positive. So I thought that's an important point to tease up and then just a follow-up.

Robert Dimond: Yes. First of all, customer count or transactions is up, although the basket is down a little bit, of course. So we're seeing some of that. But we see that as a real positive thing. People are coming back to the stores more than where they were a year ago certainly. And we're seeing strong sales and volumes as well.

Vivek Sankaran: Yes, Michael, what's been interesting is the traffic count -- the transaction count is up both online and in store over last quarter, right? And you would expect it in the store, but it's nice to see that online transactions are also over the last quarter. So and it's really a matter of baskets dropping, which also you would expect given how much of stock up there was last year.

Michael Montani: Okay. That makes sense. And then just the follow-up I had was you've seen some good traction, I think, in multichannel. And I just wanted to get a handle on any color you can share with respect to kind of the flow-through rates as that business continues to grow. And how it would compare to kind of the core brick-and-mortar flow-through? Is there a pathway to get it equal or above when you think about that, Vivek and Bob?

Robert Dimond: Yes. I'll start here. Certainly, our biggest growth has been at DUG and our Drive Up & Go. And our Drive Up & Go on an incremental basis is improving as we move along, as we're getting more and more volume into that. And we can see a day where that probably will be indifferent. As far as delivery, I don't know that we can see that, that's ever going to be something that's going to be as profitable as Drive Up & Go or the other. That last mile, that piece of it is always going to be an incremental cost.

Vivek Sankaran: Right. And Michael, then what you do. So if you like towards later in the year, towards the end of this year, we are relaunching our media platform. And so you find other sources of revenue and profit because you're getting more and more digital engagement with that customer. And that's what we're excited about. So if you think about eCommerce, yes, it's a little more logistically intensive, but you get more digital engagement that opens up other avenues for you. And that's how we see this. And then finally, I think there is a scenario down the road where the MFC start getting the cost curve pretty far down. So compared to maybe 2 years ago, we are seeing a lot more levers to make the e-commerce side of the business indifferent, if I can call it that.

Operator: The next question is from Robby Ohmes with Bank of America Securities.

Robert Ohmes: Okay. My first question is, can you hear me?

Vivek Sankaran: Yes. We can.

Robert Ohmes: Excellent. Excellent. And I apologize, I dialed in and I did miss some of the call, but so I wanted to just follow up, I think, on Simeon's question. It does look like you gained market share this quarter. Is that right from your perspective? And if so, do you think -- what was the biggest driver? Do you think vaccines played a role in that? Do you think you were doing things better within stocks? Or were you doing things maybe with relative pricing? And where do you think the market share is coming from?

Vivek Sankaran: If you look at -- if you decompose it and how and where we're gaining market share, we're gaining a lot of market share in food, in the world of food. Less so if you compare it to MULO, but on a 2-year basis, we are also holding market share in MULO. That includes all of the other channels. I think we're keeping the market share because, one, we have seen a greater index in our purchases on fresh relative to the rest of the store. So I think -- I told you transactions are up. The transaction is up because people are coming back more often for fresh, and that helps us with the market share. So clearly, that's a component of it.

I'll tell you, interestingly on the vaccines, we did -- we're proud of what we did on that, okay? We punched above our weight on vaccines. Once again, just tells our -- we are proud of how flexible the team was and how creative the team was. We got a lot of customers in who are not shopping with us, and we kept some of them. So in the grand scheme of things, Robby, it wasn't the vaccination traffic that drove our total food sales market share, I think it's more fundamental operations and running great stores and having this e-commerce business beginning to hum. :

Robert Ohmes: That's great. Congrats on the great quarter.

Operator: The next question is from Krisztina Katai with Deutsche Bank.

Krisztina Katai: Congrats on a great quarter. I guess I wanted to, again, follow-up on the market share that you continue to gain, like really good results there on a 2-year stack. So I was just curious how that has evolved throughout the first quarter compared to your expectations, really, as you started lapping some of those share gains from last year. And a follow-up to that is going to be a question on your promotional strategies. You talked a lot about being more surgical with promotions. So maybe if you could give us an update on the progress that you have made. And I was curious to see if there's anything to share that's interesting on the behavior of some of these newer customers that you have acquired over the last 12 to 15 months.

Vivek Sankaran: Yes. So the market share gains, I think first, we had a -- our last quarter last year was 26% ID. So we are lapping a very strong quarter. And I've been pleasantly surprised that on top of that quarter, we are gaining market share. And the market share gains have been steady. I look at it every week, and it's been steady. And we frankly -- we feel like we won both holidays in quarter 1, okay? And so we feel good about that.

With regards to -- you had a question on customer behaviors. The customer behaviors with the new customers -- I think a lot of customers we brought in, we brought in through eCommerce. Some of the customers we brought in, we brought in through the vaccinations, though a smaller portion. And what we're seeing there is that the customers that we are most excited about who are coming through eCommerce and then engage also in our store. They spend a lot more with us, a lot more with us than -- and the customer behavior or the -- I mean that's about -- that's the broad message I'd give you on behaviors. You had another question, though. Do you have one other? :

Promotions. Yes. Promotions, yes. If you look around our markets, you'll notice a couple of things. One is that we have fewer promotions. Our flyers are smaller. So at least the physical side of what you see. And you'll see that more of our promotions have gone digital. And when you go digital, you'll see that more of our promotions are personalized to the individual. And so that's from a broad reach perspective. And then underlying that, we've talked about a promotion technology that we have, which is now implemented fully that make sure that we don't waste promotions. And so this notion of being surgical and digital is only getting better. :

Krisztina Katai: Got it. That's helpful. And then I had a follow-up question on digital sales. So the 2-year stack was still very strong, but it did decelerate versus the fourth quarter. So my question is around your expectations for the balance of the year. And if this kind of level on a 2-year stack basis is what you're expecting going forward now as consumers are increasingly coming back to the store?

Vivek Sankaran: I think let's break down the 2-year stack. I just want to be sure that you take away from -- there are a couple of components that are still growing. Drive Up & Go is growing, it grew 75%. Traffic in our eCommerce business is still up even over 2020. So what you're seeing is relative to a very, very significant basket uptick in Q1 2020. You're seeing that come down, which is why the numbers look that way, okay? I suspect what will happen is if you keep the same traffic -- remember, the baskets got smaller as you went through the year and people ended up not panic buying like they did. I think you'll see these numbers coming back up because the traffic is still staying positive.

Operator: The next question is from Robert Moskow with Crédit Suisse.

Robert Moskow: I wanted to know that, Vivek, if you could share a little bit about what your learnings have been so far on MFCs? I -- as an outsider, it looks like your approach to this is kind of cautious. You're kind of testing and learning. So what have you learned about the operational effectiveness it can give you? And what are the challenges they pose?

Vivek Sankaran: Yes. So you are right. We are cautious in the sense that part of the trick on the MFC is first learning how to operate it and connect it to what's happening in the store. Recognize that what you're trying to do in an MFC, you're trying to pick as much as you can from the MFC, and then pick the tail from the stores so that you don't lose the specialness of what you can give the customer from a store, a bouquet of flowers, a special cut of meat and so on. But really, you've got to pick all of your core fast-moving items in the middle of the store. So first, how do you integrate it? How do you integrate orders? Because one store is now covering 6, 7 stores. How do you think about the mix, especially if you're curating by store. So there's a lot of learning on that.

There's a lot of learning also on just the algorithm that continues to learn to optimize the inventory in the MFC so you can increase the pick time, there's learning in that. And it's a lot of software that has to connect with the rest of the system, your ordering system for the overall business and so on. So we're learning a lot of those things. The second learning we're going through is how to configure it. We've got 2 that are connected to a store. We're going to open another one that's not so connected to a store. We're exploring whether we should open a complete dark one, right? :

So there are different options, and these different things fit in different markets. And so we're going to test that through the rest of this year. And then I think we'll have enough to have learned a few prototypes that we can start scaling quickly. So that's the journey we're going through, Robert. It's a -- and the nice thing about it is that I talked about the optionality. There's no need to punch out 100 of these quickly because the business is still growing with the base of the store. And by the time it gets to sufficient scale, we'll have this figured out. :

Robert Moskow: Got it. And I'll exercise one more follow-up here. You said that you want to be very active in M&A and that you're good at it. What are you seeing in terms of deal flow coming across your desk? These regional stores got a bit of a lifeline from COVID. I'm sure their sales are good. So does that mean that there's fewer opportunities to buy? Or is it different than that?

Vivek Sankaran: The deal flow is, I think it was higher pre-COVID, let me put it that way. I think we're going to have to be patient. And I think the opportunities will come. And actually, that's good because it gives us a tremendous opportunity to modernize every aspect of our business, learn how to leverage our customer data, learn how to apply technology everywhere, learn how to become personalized and extremely surgical. And so that we can get even more synergies when we do it. So that's how we're being patient, and we're going to continue to build our business.

Melissa Plaisance: Okay. We have time for 2 more questions.

Operator: The next caller is Joe Feldman with Telsey Advisory Group.

Joseph Feldman: A lot of mine have been answered. But I want to ask, can you talk a bit more about the prepared meals and the -- remind us of the expansion and what you're seeing. And I recall there were some changes that you did make to that -- to the prepared meals programs and some of the things in the stores where you try to package things more. Are you going to go back to the kind of, I guess, the salad bar type of a prepared meal plan or not as you go forward?

Vivek Sankaran: Yes, yes. Good, good question. So let me separate 2 things, okay, Joe. One is salad bars, wing bars and all of those things that we had pre-pandemic. And the amazing thing about when you have these disruptions, you still learn a lot. And so we're bringing those back, but we're bringing those back with kind of deliberately. So if you go to some markets, you'll see that we brought back the wing bar because in that -- in those markets, we sell more when you put it -- when you leave it in bulk, and there's that freshness component. There is the -- people believe you cook it -- actually they won't believe that we cook it in the stores or they see all of that.

In some markets, we've opened the salad bars, and we're having good success with it. So we're going to bring some of that. And some of those, we're not bringing back at all, right, because customers have just switched habits to having it packaged -- prepackaged for them. :

The meals program is different. The meals program, what we are trying to do is to give people the option of having meals that were -- that products that were prepared in store, taking it home and having a great meal in 15 minutes in an oven, right? And that's working really well for us. It's -- you can't do that if you don't have a tremendous presence in fresh. And if you don't have a butcher in the store to cut your meat the way -- so that it's done that morning for you. And we're rolling that out and are having great success with it. What I'm proud of the team is they also learned how to manage the shrink with it, which is the most difficult part of that whole process. :

Operator: Our last question is from Kelly Bania with BMO Capital.

Kelly Bania: Just one quick -- one clarification question and then another one on wages. Just curious if you can -- so much moving parts in the numbers right now. I was curious if you can help us kind of break down that 2-year stack of 16.5% between volume, price and mix and trade up, if you can put any kind of numbers around that maybe on a 2-year stack basis, just so we can kind of understand the underlying components there?

And then also just on wages, curious, obviously, a lot of noise in the market and announcements and increases in both wages and maybe benefits. Just curious if you can help us understand what you're thinking for this year and next year and if you're making enough investment in that area for your employees? :

Vivek Sankaran: Yes, Kelly, let me tackle the wages piece and then Bob can come back to what we can share on the 2-year stack. On the wages piece, Kelly, we are not seeing the same challenges that you might hear from restaurant operators and others, okay? We're seeing some pressure on labor in certain markets and in some of our distribution centers. It's -- and so -- and the way we're seeing the pressure there is more from turnover and the ability to fill jobs. But we are in a place where we can still quite comfortably cover it with overtime and things like that. So we feel good about that and recognize that with union wages. We -- our wages are typically higher than the market. We offer benefits. And the increase that we'll see in wages as we go forward will be part of the negotiated contracts. And it typically ranges around 2%, as set of contracts come up and it ranges in that. So that's how we think about the planning horizon on wages. Bob, could you share because the units are significant....

Robert Dimond: Yes, you're exactly right. I would say on the 2-year stack, the most significant part of the increase there is certainly on units.

Vivek Sankaran: Yes.

Robert Dimond: Now if you try to look at things from a customer versus basket perspective, what we will say, and I think we said this a little bit earlier, we're pleased to see that we're favorable on customers versus a year ago. which was certainly down big time a year ago. But I don't think we're quite back to the levels that we were in 2019, but we see it trending that way.

Vivek Sankaran: Correct.

Melissa Plaisance: Okay. Well, thanks, everyone, for participating. We ran a little bit over given some of the glitches in this call. We appreciate your interest in Albertsons Companies. And Cody Perdue and I will be available the balance of the day for the follow-up calls. Thank you.

Vivek Sankaran: Thank you all.

Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.

Earnings Transcript for ACI - Q1 Fiscal Year 2022

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