Albertsons Companies, Inc.

Ladies and gentlemen, welcome to the Albertsons Company's fourth quarter 2020 conference call. Thank you for standing by. All participants will be in a listen-only mode until the Q&A session. This call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Melissa Prezance, GVP of Treasury and Investor Relations. Thank you. You may begin. Thank you.

Good morning, and thank you for joining us for the Albertsons Company's fourth quarter 2020 earnings conference call. With me today from the company are Vivek Shankaran, our president and CEO, and Bob Diamond, our CFO. Today, Vivek will share insight into our fourth quarter and fiscal 2020 year-end results, as well as review our progress against our strategic priorities. Bob will then provide the financial details of our fourth quarter and full year 2020 and as well as our full year 2021 outlook, before handing it back over to Vivek for some closing remarks. After management comments, we will conduct a question and answer session. I'd like to remind you that management may make statements during this call that include forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not limited to historical facts, but contain information about future operating or financial performance. Forward-looking statements are based on our current 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 Form 10Q, 10K, and 8K. 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-gap measures, and historical financial information includes a reconciliation of net income to adjusted net income and adjusted EBITDA. And with that, I will hand the call over to Vivek.

Thank you, Melissa. Good morning, everyone, and thank you so much for joining us today. I want to start today by thanking our associates for their unwavering commitment to take care of our customers, our communities, and each other during every twist and turn of the pandemic over the last year. 2020 was a difficult year for all of us, and our hearts go out to all those directly impacted by the virus. 2020 was also a transformational year for Albertson's companies. We deepened our relationships with customers and added many new ones through our execution in stores and through online channels. We accelerated digital transformation across our company. Almost every critical capability in our company is now enhanced with or enabled by technology. We delivered our planned productivity target and we added to it. We further strengthened our culture, learning how to sustain the flexibility and speed that comes with being locally great, while at the same time leveraging the scale benefit that comes with being nationally strong. As I've mentioned throughout the year, our strategy is focused on building deep relationships with our customers. We support this strategy with our differentiated product offerings, anchored in fresh and owned brands, our breadth of assortment so they can complete their shop with us, everyday execution excellence in every store, and a suite of omnichannel capabilities that allow customers to conduct their shopping with us in any way they want. Our enhanced loyalty program is also resonating with customers as we provide them with personalized offerings and drive repeat shopping occasions. As a result of our team's execution, we delivered strong performance in the fourth quarter and record results for the year. Our full year results exceeded our outlook across all key metrics, with ID sales up 16.9%, adjusted EBITDA up over 60% to $4.5 billion, and adjusted EPS growing 212% to $3.24. And Q4, ID sales were 11.8%, with continued market share gains in both dollars and units. Importantly, growth in Q4 remains strong across our geographies, regardless of the level of COVID restrictions in place. giving us confidence in the sustainability of our competitiveness in the future. Our digital initiatives were a key catalyst for growth. In Q4, digital sales growth accelerated to 282%, with growth of 258% for the full year. Membership in our Just For You loyalty program continued to accelerate sequentially and has been up over 20% year-over-year each quarter and is now at 25.4 million members. with a 93.1% retention rate. These members have been a key driver of share gains as they spend 2.6 times more than non-registered customers. We've also increased the number of actively engaged customers almost 10%, who spend nearly five times more than a non-active customer. We know our retention rate is 34% greater when a household is actively engaged in our loyalty programs. We closed 2020 with almost 11 million more identified households shopping our stores than in 2019, allowing us to understand which categories they're purchasing with us for the first time, how often they're coming back to repurchase, how they're progressing up the loyalty ladder, and their incremental spend levels as they migrate from in-store to omnichannel engagement with us. We ended fiscal 2020 with three times the number of omnichannel households compared to fiscal 2019, fiscal year end 2019. These households spend more with us and are more profitable. We also saw that as customers moved into omnichannel, they also increased their spend in our stores with a net growth of 20% per household and a total spend rate two times that of an exclusively in-store shopper. We also saw even our most loyal households early last year purchase two times the number of categories in our stores than the prior year, for example, in paper goods. And we're able to quickly reward these new category buyers with personalized deals to retain that category spend in our stores. At the start of the fiscal 2020, I shared with you four strategic priorities that we are focused on. In-store excellence, accelerating our digital and omni-channel capabilities, driving productivity, and strengthening our talent and culture. Regarding in-store excellence, our ability to create a one-stop shopping experience for our customers has remained a key differentiator for us, supported by the quality, variety, and depth of our fresh and own-brands offerings that give us a competitive advantage. In fresh, we continue to see ID sales outpace center store by 300 basis points. Standouts during the quarter were seafood, meat, floral, as customers continue to spend more time at home. This trend continues as we see customers supplementing their weekly stock-up shop, filling in with fresh items in smaller trips during the week. Our own brand's portfolio also continues to gain traction, driven by the introduction of new innovative products, as well as our focus on Albertson's legacy divisions that were historically under-penetrated. Much of the disruption of the supply chain at the start of the year has abated, and penetration continued to improve in Q4 and is now exceeding 25%. We continue to expect own brands penetration to reach 30% in the next few years. With gross margins approximately 1,000 basis points higher than national brands, this should increase our flexibility to grow the business going forward. We are continuing to innovate and expand our portfolio of brands, moving quickly to meet evolving consumer preferences. As a result, we launched over 1,200 items in fiscal 2020, well above our stated goal of 800-plus new items for the full year. We're also working on some exciting changes to our meals program that will give us significant growth opportunities. We're expanding the rollout of our Ready Meals program in our United Division to other divisions, where we make ready-to-eat, ready-to-heat, and ready-to-cook meals in our stores. Finally, we continue to invest in our stores. We opened nine new stores and completed 409 upgrades and remodel projects during fiscal 2020. Moving on to our second priority. the acceleration of our digital and omnichannel capabilities. Digital continues to be a key growth driver for us as we achieved over 200% digital sales growth in each quarter this year, demonstrating the strength of our digital offerings to capture consumer demand for more convenient shopping experiences. Drive Up and Go grew over 1,000% in Q4 and 865% during fiscal year 2020. We launched 343 new Doug locations in Q4, and Doug is now available in 1,420 stores. This puts us ahead of schedule, and we now expect to have Doug in approximately 2,000 stores with 98% coverage by the end of fiscal year 21, above our prior target of over 1,800 stores. We're also extremely pleased about the profit curve in our digital business, particularly in drive-up and go. We are seeing our incremental dog sales driving flow through of mid to high single digits, and we expect that to continue improving as our dog business continues to scale. In 2020, we saw significant acceleration in consumer preferences towards digital, and we drove a step change in our digital offerings to meet this demand. During the year, we invested over 300 million to accelerate our offerings and launch new capabilities. To enhance the customer experience, They've improved our on-time tilling and delivery to 95%, enabling consistent on-time delivery and duck pickups. We leveraged our loyalty program to provide exclusive events like virtual cook-alongs with celebrity chefs. We began a trial of an automated electric delivery robot powered by TARDIS and continued to pilot a number of walk-up and go options, including walk-up counters, pickup lockers, and standalone kiosks. And we're testing in-market an integrated loyalty and e-commerce app offering an effortless ordering experience to a single interface. And to improve the profitability of the business, we shifted delivery at many of our location's third-party logistics providers to improve speed and lower costs. We improved our picking software, optimizing and standardizing the picking process to drive cost reduction to increase picks per hour and improve order prioritization. From our two MFC installations, as in-stock conditions have improved, we have learned that the labor cost per order can be dramatically reduced without compromising the breadth of assortment and the customization a customer can get from our store. We're opening our third MFC this week, and that plans for an additional six before the end of our fiscal year, bringing our total to nine MFCs. Our third strategic priority is driving productivity to support reinvestment in the business and help offset inflation. We achieved approximately $500 million in gross productivity savings in fiscal 2020 as a result of our actions, with large contributions from indirect spend, labor productivity, and shrink reduction. Given our progress to date and incremental opportunities we see ahead, we now expect to exceed our goal of $1 billion in gross savings by the end of fiscal year 2022. and have increased our cumulative target to $1.5 billion. The additional $500 million in savings is principally driven by new projects related to the transformation of our supply chain and additional cost reduction programs and further optimization of our promotional spend. Our fourth priority is strengthening our talent and culture and supporting the communities we serve. We're committed to adding talent in key areas and recently announced that we have hired a new chief data officer to lead efforts in translating data into an enhanced customer experience. In addition, I would like to call out the contributions of our pharmacy teams to our communities. Partnering with the Department of Health and Human Services and with local authorities, they have administered 3.1 million COVID vaccine doses as of Friday last week. We are very proud of how nimble our pharmacy teams have been to support this effort, delivering the service in our stores and in several off-site locations, enabling easy scheduling through our app, executing with high throughput, and emphasizing equitable distribution and dispensing of vaccines. We are now providing access to vaccines in 100% of our locations. In total, we have hired 1,000 new associates and trained 2,000 pharmacy technicians to support this effort and invested in technology solutions, including handheld devices to make it easier for our associates to facilitate these transactions outside our stores. During fiscal 2020, we also supported our communities with food and charitable donations totaling $260 million. For example, through our Albertsons Foundation Nourishing Neighbors program, we gave $95 million of support to the communities in which we operate and reached 13 million individuals and over 3,000 organizations. and we assisted our neighbors in Texas following the unprecedented winter storm there, matching the first $250,000 raised in our stores. These actions are all part of our ongoing focus on ESG. We recently completed a new materiality assessment, which will be the foundation for our ESG strategy and initiatives going forward as our efforts here continue to evolve. We've already identified high-priority areas, and you can expect to hear more from us on topics such as diversity, equity, and inclusion, energy and emissions, product and consumer packaging, food waste, and community stewardship. And last week, we announced our commitment to setting a science-based target to reduce carbon emissions. And now, I would like to ask Bob to cover the details of our fourth quarter financial results.