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spk07: Thank you for standing by. Welcome to the Albertsons Company's first quarter 2021 earnings conference call. All participants will be in listen-only mode until the Q&A session. This call is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to hand the call over to Melissa Plaisant, GVP, Treasurer and Investor Relations. Please go ahead.
spk01: Good morning, and thank you for joining us for Albertsons Company's first quarter 2021 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 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.
spk19: 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 remained 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 two-year basis, and we continue to gain market share in food on a one-year basis and in MULO, which includes most food, drug, mass, club, dollar, and military on a two-year basis. In addition, we achieved EBITDA of, adjusted EBITDA of 1.3 billion and adjusted EPS of 89 cents a share ahead of our expectations. Against a 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 two-year stacked ID sales growth of 276%. With all the options we have in place, we have achieved 95% customer coverage with e-commerce, and retention has been strong. At the same time, we have seen a pickup in in-store transactions versus Q1 2020, and many of those incremental in-store shopping trips are focused on fresh. At the end of Q1 2021, we had 3.6 times the number of omnichannel households than we had two years ago in 2019. We've seen that as customers move into omnichannel, they also increase their spend in our stores, with a net growth of 17% per household spend in the quarter and a total spend rate of two times 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 You loyalty program continued to accelerate and was up over 18% year-over-year in Q1 2021 to 26.7 million members. We also increased the number of actively engaged customers by almost 13%, and we have a 94% retention rate with engaged Just For You households. Remember that actively engaged customers spend four times 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 four priorities. In-store excellence, accelerating our digital and omni-channel 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 brand's 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's sales growth outpaced center store by approximately 200 basis points on a two-year basis. with 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 brand's 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 Albertson's legacy divisions that were historically underpenetrated. Our Q1 sales penetration was 25.2%, up over 100 basis points from Q1 2020 when supply issues impacted sales. We continued to innovate, launching 318 new items in Q1 2021, 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 brand scheme 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 programs and expect to be in approximately 500 stores by our fiscal year end. Finally, we continue to invest in our stores. We opened five new stores and completed 33 upgrade and remodel projects during Q1 21. Our second priority is the acceleration of our digital and omni-channel 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 Doug locations, drive up and go locations in Q1 21, bringing our total to 1,740 and Doug sales grew 75% year over year. We now expect to have Doug 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 e-commerce app offerings, a connected customer experience through a single interface. We launched the new San Jose Berryessa MFC, and that plans for an additional six MFCs before the end of our fiscal year, bringing the total to nine MFCs. We sped up delivery times while reducing delivery cost per order by expanding our third-party delivery store network while also adding DoorDash one-hour delivery to our e-commerce options, which has been rolled out to nine 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.
spk20: And we improved customer service by migrating all support to one IT platform.
spk19: 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 Company's 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 for our first quarter financial results and outlook.
spk02: 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% two-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 two-year basis, we decreased parts 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 one time 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 89 cents, 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 five stores, closed five, 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 what 1.5 times 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 vaccination 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 two-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 two-year compounded annual growth of 47% at the midpoint of the range, up 25 cents 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 two-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.
spk19: 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 pickup and store and rapid delivery. Particularly in our industry, consumers value speed and delivery, and we're 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're 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 for continuing to take care of our customers and communities this quarter, as well as throughout the pandemic. We will now take your questions.
spk07: Thank you. We'll now begin the question and answer session. In the interest of hearing from as many callers as possible, we ask that you limit yourself to one question. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. Once again, anyone in the call who wishes to ask a question, please press star then one. The first question is from John Heinbacher from Guggenheim Partners. Please go ahead.
spk03: Eva, I'm going to do two 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, you know, 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, you know, 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?
spk07: Pardon me, we seem to be having technical issues with the speaker's line. I believe that they are speaking now, but we're not hearing them. I'm going to pause for a moment and try to reconnect their line. One moment, please. Thank you. Okay, we have the speakers again. Please proceed.
spk19: Hey, 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're still seeing no trade down. They're still buying many, many discretionary items in our store, traded up on meat, wines, etc., 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, 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. E-commerce continues to be strong. You know what? If I was to dissect that a little bit, you'll see that our e-commerce 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 e-commerce. But what's very interesting is 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. 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 in Kings and Balducis.
spk05: Thank you.
spk07: The next question is from Paul of Citibank. Please go ahead.
spk09: Hey, thanks guys. We're back towards the end of your prepared remarks. I think you had a couple of comments about inflation. Just, just wondering if you could dig in a little bit deeper in terms of what you're seeing on the, 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 it change the way you think about pricing on national brands versus, uh, what you might do with your private label product pricing? Thanks.
spk19: Do you want to talk to an inflation involved in how to do the pricing piece?
spk02: You bet. Um, uh, Paul, what we saw in a product cost inflation was, uh, uh, you know, somewhat modest, uh, 1.5 to 1.7% during the quarter. And, uh, So we saw that that was increasing slightly as the quarter continued, but still within a reasonable range.
spk19: Yeah. And, you know, our outlook on that is that I think it might be slightly higher towards the back half of the year, Paul. But, you know, I've always maintained that if it continues to be in the 3% to 4% range, it's actually good for the business. You know, 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 it into that range. Now, when it comes to pricing on own brands, look, our own brand's penetration is up. That's a good sign. It helps us on gross margins. You know, we were all worried. You were all worried whether own brands are going to decline, but it's coming back nicely. Our own brand's pricing will always be, you'll have two 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 crack it with what's happening in the national brands.
spk05: Thank you. Good luck. Thanks, Paul.
spk04: Our next question is from Karen Shorts with Barclays.
spk07: Please go ahead.
spk16: Hi. Thanks very much. 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 would just want to 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 1Q, mostly to 1Q gross margins. I'm just trying to understand the magnitude of the vaccine component on 1Q.
spk02: Great question. Yeah, great question, Karen. You've got part of it right there. Certainly the vaccine income was a portion, but it's actually the larger portion. If you go back five years, kind of throw 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.
spk19: And we're accelerating drug rollout. We're pulling it further up into Q2 because we think we can go faster and should go faster. So it's a combination of things there, Karen. That's right.
spk16: Okay, thanks. And then thanks for the clarification. 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 risk 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?
spk19: Yeah, there are two topics, two 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 two new initiatives. The first one is around supply chain, which is optimization of our distribution centers, rethinking 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 two things. One, we've pursued the dollars, and we're 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're able to leverage the local knowledge that people have. We've maintained the core of those teams in our market 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. And we've worked through every detail there, and we're very conscious of it. There 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, you know, to me, I'd rather do this and work it than be afraid to do it, and that's where we're going down this path.
spk16: Okay, that's helpful. Thanks very much.
spk04: The next question is from Scott Mushkin with R5 Capital. Please go ahead.
spk05: Scott.
spk04: Mr. Mushkin, your line is open. Okay, we'll move on to the next caller.
spk07: The next caller is Edward Kelly with Wells Fargo. Please go ahead.
spk08: Hello, Ed. Hi, guys. Good morning. I wanted to go back to the gross margin. Your performance on a two-year basis, you know, 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?
spk02: 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, 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, um, a higher gross margin to it. Uh, our fresh mix that also is, uh, been growing, uh, as well. And so all of those things, uh, kind of work together, um, to, uh, support that, that 90 basis points. Now, um, as far as, uh, going forward, how we, uh, guided in our last conference call, as you might remember is we said that, uh, we felt like that we would be directionally flat to the 2020 fiscal year overall forest margin, which implies that we'll be up the roughly 65 basis points that we were up in 2020 versus 2019 for the full year. It's not going to necessarily be, you know, a flat amount per quarter because last year was kind of a strange year and there were There were some quarters that were higher than others. So I would kind of, if you were to pattern it off of anything, I'd pattern it off of adding that to 2019.
spk19: And Ed, you know, 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 a store, is accretive to gross margin. And so we keep seeking that. 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 this gives us is it gives us a chance to surgically keep investing in price and other things that we can do to drive growth and get more volume through the P&L, which clearly in our business gives us tremendous flow through. So that's how we played. You'll always find us seeking more ideas.
spk08: 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? You've been more than covering that need. How do we think about the real sort of like optionality around this First, you know, 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.
spk02: Yeah. 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 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 to a little bit later on. We keep our eyes open for M&A opportunities, but that would be our priority.
spk19: Yeah, and we will remain opportunistic. We are good at buying and merging 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.
spk05: Great. Thank you.
spk07: And the next question is from Scott Mushkin with R5 Capital. Please go ahead.
spk11: Let's try to do this again. Hopefully you guys can hear me this time. I can hear you, Scott. Hi. Okay, perfect. I think maybe it's my phone. I don't know. Anyway, I wanted to ask a longer-term question around omnichannel, digital, and just really understanding two things. Number one, it seems like you guys are trying to pursue a much more acid-light model compared to some of your competitors, and I wanted to make sure my interpretation is correct there. Then the other thing I wanted 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, and I think there was just, you know, fighting in the shelves with the pickers is difficult. So those are kind of two questions that I had to follow up.
spk19: Yeah, let me start with the second question first, right? Because our e-commerce 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, you know, 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 e-commerce business. And our e-commerce 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. 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 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 number one priority.
spk11: That's great. Thanks. And then my follow-up is actually a little bit, I think, where maybe Ed was going on this – this question is that, you know, your stock sitting here with my math, just under five times 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? You know, do you guys even think about it? Thanks.
spk19: Thank you, Scott. You know, there's about $11 billion pre-pandemic real estate value also embedded in this. So, you know, we think we agree with you. We agree with you and hopefully continue to put up quarters like this will make a difference.
spk11: All right, guys. Thanks very much. Nice quarter.
spk07: The next question is from Ken Goldman with J.P. Morgan. Please go ahead.
spk14: Hi, thank you. You mentioned that you were successful in passing along inflation. Vivek, 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 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.
spk19: Yeah, Ken, hey, good morning. Yeah, let me put it this way. Of course, 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 a large own-brands business, and because of that, we get tremendous transparency also into 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 where there is a legitimate cost increase and requiring a price increase, and we'll do that. But it rarely is that our entire portfolio goes up 3% to 4%. You know, 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.
spk14: Okay, that's helpful. And 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.
spk19: It's remarkably about the same as it was for the last – I looked at it just recently. You index promotions and stuff. It's about the same for the last two or three quarters, Ken. I think you have two – one is you talked about the elasticity. The other thing to keep in mind is supply. The types of things that you would tend to promote – And football, like 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.
spk04: Thank you.
spk07: The next question is from Kate McShane with Goldman Sachs. Please go ahead.
spk20: Hello, Kate. Kate, we can't hear you.
spk04: Kate McShane, your line is open. Kate, why don't you dial back in? We'll pick you up. Let's go to the next caller. Certainly. The next caller is Simeon Goodman with Morgan Stanley.
spk07: Please go ahead.
spk00: Hey, everyone. Good morning. I hope you can hear me. Nice quarter.
spk20: Yeah, we can hear you.
spk00: 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 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 that it accelerated in Q1. Can you break apart units and 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 go back post-COVID? Why should that hypothesis still hold going forward? Are you seeing things that give you confidence in that now?
spk19: Yeah, Simeon, let me answer the second one. Bob, can you 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 or the 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 three days to the office or two days to the office, but that really means two days at home or one 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, you know, 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.
spk02: 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. Consistent, right? 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 that. where sales are going. Thank you.
spk04: The next caller is Kate McShane from Goldman Sachs. Please go ahead.
spk17: Hi, good morning. Can you hear me?
spk20: Yes, Kate.
spk19: Sorry about the technical stuff, but we can hear you well.
spk17: Okay, good. 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 you 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?
spk19: Yeah, so Kate, let me split that into two buckets. One is recognize that the fastest growing business for us is drive up and 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 and go, we have everything, right? We do the entire 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 two-hour delivery. And we believe in the notion of speed in e-commerce, 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 the, and that part of the business, you know, we are using, we are using multiple partners. Um, and really our philosophy there is that we're going to meet the customer where they want. Right. And, and really, 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, it, it, it works for everybody, including the third party when we're shopping proximal to where the customer is living. So that works for us. And what we're doing is we're 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 look at it in three parts, and I just think at the end of the day we'll focus on reaching that customer in many, many different ways.
spk04: Thank you.
spk07: The next question is from Michael Montani with Evercore. Please go ahead.
spk21: Hey, good morning. Thanks for taking the question. Just wanted to ask if I could on the 10% ID sales decline and then 16.5 two-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 to follow up.
spk02: Yeah. 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. 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.
spk19: Yeah, Michael, you know, 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, you know, it's nice to see that online transactions are also over last quarter. And it's really a matter of baskets dropping, which also you would expect given how much of stock up there was last year.
spk21: Okay, that makes sense. And then just the follow-up I had was you've seen some good traction, I think, in multi-channel. 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, you know, 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?
spk02: Yeah, I'll start here. Certainly our biggest growth has been a drive up and go. And our drive up and 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 and Go or the other. That last mile, that piece of it is always going to be an incremental cost.
spk19: Right. And, Michael, then what you do, so if you, like, 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 e-commerce, 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 go. And then finally, I think there is a scenario down the road where the MFCs start getting the cost curve pretty far down. So compared to maybe Two 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.
spk21: Really interesting stuff.
spk05: Thank you for the color.
spk04: The next question is from Robbie with Bank of America Securities.
spk22: Please go ahead. My first question is, can you hear me? Yes, we can. Okay, excellent. Excellent. Hey, 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. You know, is that right from your perspective? And if so, you know, do you think, you know, 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?
spk19: 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. You know, less so if you compare it to MULO, but on a two-year basis, we're 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 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. You know, I'll tell you interestingly on the vaccines, we're proud of what we did on that, okay? We've punched above our weight on vaccines. Once again, just tells us, you know, we're proud of how flexible the team was and how creative the team was. We got a lot of customers in who were 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.
spk22: That's great. Congrats on a great quarter.
spk20: Thank you, Ravi.
spk04: The next question is from Christina Katai with Deutsche Bank.
spk07: Please go ahead.
spk06: Hi, guys. Good morning, and 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 in a two-year stack. I was just curious, you know, how that has evolved throughout the first quarter compared to your expectations, really, as you started mapping some of those share gains from last year. And, you know, a follow up to that is going to be a question on your promotional strategies. You know, you talked a lot about being more surgical with promotion. 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.
spk19: Yeah, so the market share gains, I think, you know, first, we had our last quarter, quarter last year was 26% ID. So we're 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 one, okay? And so we feel good about that. With regard 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 e-commerce. 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're most excited about who are coming through e-commerce and then engage also in our store, they spend a lot more with us, a lot more with us. And the customer behavior, that's the broad message I'd give you on behaviors. You had another question, though. Did you have one other? Oh, promotionals. Yeah. Yeah. Promotions, yes. You know, if you look around our markets, you'll notice a couple of things. One is that we have fewer promotions. You know, 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 makes sure that we don't waste promotions. And so this notion of being surgical and digital is only getting better.
spk06: Got it. That's helpful. And then I had a follow-up question on digital sales. So the two-year stock 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 two-year stack basis is what you're expecting going forward now as consumers are increasingly coming back to the store.
spk19: I think let's break down the two-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 and go is growing through 75%. Traffic in our e-commerce 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 know, 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.
spk04: Great. Thank you so much. The next question is from Robert Musco with Credit Suisse.
spk07: Please go ahead.
spk13: Hi, Robert. Hi. Thanks for the question. I wanted to know, Vivek, if you could share a little bit about where your learnings have been so far on MFCs. As an outsider, it looks like your approach to this is kind of cautious. You're kind of testing and learning. So, you know, what have you learned about MFCs the operational effectiveness it can give you and what are the challenges they pose?
spk19: Yeah. So you're right. We are cautious in the sense that, you know, 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 and then pick the tail from the store 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 six, seven 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 two 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. 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. 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.
spk13: 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? You know, 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?
spk19: The deal flow is, you know, 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. 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 so that we can get even more synergies when we do it. That's how we're being patient, and we're going to continue to build our business.
spk13: Okay, great. Thanks for that question.
spk12: Okay, we have time for two more questions.
spk07: The next caller is Joe Feldman with Telsey Advisory Group. Please go ahead.
spk10: Hi, Joe. Hey, guys. Hi, how are you? Thanks for taking the question. A lot of mine have been answered. But I want to ask, can you talk a bit more about the prepared meals and the You know, it reminds 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 tried 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?
spk19: Yeah, yeah. Good, good question. So let me separate two 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 is you learn a lot. And so we're bringing those back, but we're bringing those back kind of deliberately. So if you go to some markets, you'll see that we've brought back the wing bar because in those markets, we sell more when you leave it in bulk and there's that freshness component, there's the People believe you're cooking – not believe. They cook it in the store, so 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 it, 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're trying to do is to give people the option of having – Meals that were – products that were prepared in store, taking it home, and adding a great meal in 15 minutes in an oven, right? And that's working really well for us. 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 so that it's done that morning for you. And we're rolling that out and we're 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.
spk10: That's really helpful. Thanks. And most of my others were asked, so I'll pass it on. Thank you.
spk07: Okay, last question. Yes, our last question is from Kelly Banyal with BMO Capital. Please go ahead.
spk18: Hi, Kelly. Hi, good morning. Good morning. Thanks for fitting me in. I have just one quick... Thanks. One clarification question and then another one on wages. Just curious if you can... There's so much moving parts in the numbers right now. I was curious if you can help us kind of break down that two-year stack of 16 and a half between volume, price, and mix, and trade-up, if you can put any kind of numbers around that, maybe on a two-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. Thank you.
spk19: Kelly, let me tackle the wages piece and then Bob, come back to what we can share on the two-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. And the way we're seeing the pressure there is more from turnover and the ability to fill jobs. But we are at 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, 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%, you know, a 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 universe are significant on it.
spk02: Yeah, you're exactly right. I would say on the two-year stack, The most significant part of the increase there is certainly on units. 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.
spk12: 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 Albertson's companies. And Cody Perdue and I will be available the balance of the day for the follow-up calls. Thank you. Thank you all.
spk07: This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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