This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk12: Good morning, and thank you for joining us for the Albertsons Company's first quarter 2022 earnings conference call. With me today from the company are Vivek Shankaran, our CEO, and Sharon McCollum, our president and CFO. Today, Vivek will share insight into our first quarter results, as well as review our progress against our strategic priorities. Sharon will then provide the financial details of our first quarter, before handing it back over to Vivek for some closing remarks. After management 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 filing. including on forms 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-GAAP measures, and historical financial information includes the reconciliation of net income to adjusted net income, and adjusted EBITDA. And with that, I will hand the call over to Vivek.
spk09: Thank you, Melissa. Good morning, everyone, and thanks for joining us today. In the first quarter, our teams continued to deliver strong operating and financial performance across all key metrics. We want to thank all of our associates for their ongoing service to our customers and communities. We are so proud of their resilience, agility, and passion for excellence in this challenging operating environment. In Q1, ID sales increased 6.8%, and we continued to gain market share in food and MULO. We also maintained our number one or number two position in 68% of the 121 MSAs in which we operate. In addition, we delivered year-over-year adjusted EBITDA growth of 9%, to $1.42 billion and adjusted EPS of $1 per share. Q1 digital sales increased 28% year-over-year as our digital offerings continue to resonate with customers and we further optimized our cost to serve. Also in Q1, we continue to leverage our digital investments. Omnichannel households increased 34% year-over-year with retention rates over 90%, and they spend three times more than an in-store-only shopper. At the same time, in-store transactions also increased as we continued to invest in new merchandising initiatives and our Just For You loyalty offerings. Just For You loyalty members increased 16% to 31 million, with actively engaged members reaching an all-time high and spending four times more than a non-actively engaged member. Like omnichannel households, retention remained at over 90%. These growth trends affirm our belief that engaged and connected digital and in-store experiences will result in long-lasting customer relationships and industry-leading growth, the underpinnings of the next phase of our transformation strategies. Customers for Life, which we introduced last quarter, is based on placing the customer at the center of everything we do. We want our customers to interact with us daily, not only to shop, but to consume relevant content about food, plan meals, or find information to inspire their well-being. When we laid out our fiscal 2022 priorities in our last earnings call, We shared that we are investing in four strategic priorities that I will update you on now. First, we are deepening our digital connection and engagement with our customers, which supported our 28% digital growth in the quarter. This growth was driven by an expansion of our services and innovation. For example, we were operating 2,075 drug stores, drive-up-and-go stores at the end of Q1. Our focus on speed is paying off. For example, our express delivery, two hours or less, is now available to 74% of our households, and penetration of this option has increased fivefold versus prior year. During Q1, we launched new merchandising features in our unified mobile app, providing an increasingly personalized and curated digital experience. Since the launch, we've seen significant growth in the number of new users and improvements in our iOS and Android app store ratings. We also saw increased digital engagement driven by our meal planning tool launched last quarter. The meal planning capability inspires our customers to engage in our app more frequently as they plan, shop, and prepare the recipes we offer, which can be filtered by dietary preferences such as carb-conscious, vegetarian, and pescatarian. In Q1, we had over 1.2 million unique visitors explore our meal planning tool, and over 40% of them used the add to shopping list functionality in the app to create their shopping list. We also continue to invest in the Albertsons Media Collective, using industry-leading technologies to build a platform that is easy to use, transparent, modern, and measurable. We transitioned in-house, and while we are in the very early stages of onboarding clients and agency partners, we are pleased with the growth in the business. Second, we are differentiating our store experience by deepening engagement through the use of technology to automate task management, thus creating more time for our team members to assist our customers, despite a difficult staffing environment. We're also simplifying the end-to-end shopping journey by improving localized assortments and adjacencies of complementary products, installing more checkouts, and adding grab-and-go sections to ensure a convenient and easy experience. In support of our omnichannel growth, we are evolving store operations, building out staging areas for drive-up-and-go, adding wear rooms for easier picking, and installing additional NFCs. Third, we are enhancing what we offer by expanding our own brand products and elevating our distinctiveness in fresh. We are actively leveraging the strength of our own brand's assortment and our ability to manage fresh hyper-locally to give customers great choices in the inflationary environment we are in. In own brands, our sales penetration reached an all-time high at 25.8%. and Own Brands sales outpace national brands in several categories. In the quarter, we launched 59 new items, including new heater options, and we expect to launch a total of approximately 425 new products this year. While much of the growth in Own Brands is related to increases in under-penetrated markets and product innovation, the breadth of our Own Brands portfolio, from opening to premium price points, also provides great value to customers who are trying to stretch their budgets. In Fresh, our in-store processing capabilities allow us to tailor the selection, the cuts, and package sizes to fit local demographics and economic circumstances. We are giving customers choices with opening price points and large value packs. Our innovation, too, is gaining traction. For example, We now have rolled out our ready meals, our ready-to-eat, ready-to-heat, and ready-to-cook meals to approximately 600 stores and expect to be in more than 1,100 stores by our fiscal year-end. Both, we are modernizing our capabilities in part through an improved supply chain, enhanced data and data analytics, and ongoing productivity, all built on the foundation of being locally great and nationally strong. In supply chain, we're currently increasing automation in two of our largest distribution centers and expect to continue to roll out similar automation across our network over the next several years. We've also begun the progressive rollout of a new enterprise-wide warehouse management system that is expected to be fully implemented network-wide by fiscal 2025. Both these initiatives are expected to materially improve our ability to differentiate our fresh quality, improve in-stock conditions, lower our cost to serve, and improve our end-to-end supply chain data analytics capabilities. In our stores, we're rolling out AI-based and machine learning technologies to improve the customer experience in self-checkout, enhance freshness and product availability in produce, and reduce shrink. In addition, we've continued to modernize our technology through cloud migration and the upgrade of our edge computing platform. And finally, we're further embedding ESG throughout our operations. We launched our new ESG framework in April. Recipe for Change is focused on maximizing the company's positive impact across four pillars, planet, people, product, and community. We have a long history of driving sustainability within our operations and are committed to leveraging our resources and expertise to support the communities we serve and the planet we share. Also in April, we began utilizing electric terminal tractors in our distribution centers in place of diesel-powered options, and we have plans to expand our fleet later this year. We continue to support hunger relief in the communities we serve through food bank donations, and a $7.7 million fundraiser supporting our Nourishing Neighbors initiative. These funds will provide over 30 million meals to people in need. I will now turn the call over to Sharon to cover the details of our first quarter and our updated 2022 outlook.
spk13: Thank you, Vivek, and good morning, everyone. It is great to be here with you today. Our first quarter results were strong across all key metrics. Identical sales were up 6.8%, with momentum continuing into Q2. Market share gains in both dollars and units, together with inflation, drove these better-than-expected results. Our Q1 2022 gross margin rate was 28.1%. Excluding fuel and LIFO expense, the gross margin rate was lower than Q1 2021 by 27 basis points. This decrease was driven by fewer COVID-19 vaccines versus Q1 last year. And consistent with our expectations for the quarter, excluding fuel, LIFO, and fewer COVID vaccines, our gross margin rate was slightly ahead of the first quarter last year. due to ongoing productivity improvements offsetting higher product and supply chain costs. Our selling and administrative expense rate was 25.2% this quarter. Excluding fuel, the SG&A rate decreased 15 basis points compared to last year. This decrease was primarily driven by lower COVID-related expenses and the benefit of productivity initiatives. These decreases were partially offset by investments related to the acceleration of our digital and omnichannel capabilities, market-driven wage rate increases, and higher depreciation. Interest expense in Q122 decreased $14 million to $139 million. This reduction was primarily driven by a lower outstanding debt balance. Q1 22 adjusted EBITDA was 1.42 billion compared to 1.31 billion last year. This $110 million increase was primarily driven by the flow through from our 6.8% ID sales increase and benefits from our productivity initiative. Q1 adjusted EPS was $1 per fully diluted share compared to 89 cents in Q1 2021. I'll now discuss Q1 2022 cash flow and capital allocation. We ended Q1 2022 with $3.2 billion in cash, which provides us with significant liquidity to invest in growth and return cash to our shareholders. Capital expenditures in Q1 were approximately $614 million, with the majority of our investments being made in the modernization of our store fleet and ongoing investments in our digital and omnichannel transformation. We also returned 63 million to our shareholders through common stock dividends. Net debt leverage at the end of the first quarter was 1.0 times compared to 1.5 times in Q1 2021. Turning to labor relations, we have continued to reach settlements that are providing an overall wage and benefit package that rewards our team members for their significant contributions and strengthens our competitive positioning in the markets we serve. During Q1, as previously shared, we settled retail contracts in both Northern and Southern California, Seattle, Las Vegas, and Shaw's. And earlier this month, we reached a tentative settlement on the retail contract with Juul. I'd now like to discuss our financial outlook. As we look forward to Q2 and the rollout of our customers for life strategy, we do so with continued momentum as evidenced by our Q2 to date mid single digit ID sales increases. We are gaining market share and continue to see signs of a healthy grocery consumer who is engaging broadly. While we and the industry are seeing a bit of trade down within and out of some fresh categories as consumers stretch their budgets, our share gains in fresh continue. With that as our backdrop, we have raised our fiscal 22 outlook, assuming the following. We now expect fiscal 22 ID sales to increase 3 to 4 percent, up 100 basis points versus previous guidance of 2 to 3 percent, driven by continued inflation and market share gains. In the second quarter, we expect ID sales to be above the full year range and in the back half below due to cycling heightened inflation in the back half of fiscal 21. We are also increasing adjusted EBITDA by 100 million to the range of 4.25 to 4.35 billion versus previous guidance of 4.15 to 4.25 billion. Our gross margin rate, excluding fuel and LIFO, we are expecting core business gross margin rate expansion driven by productivity tailwind. Offsetting this, however, is a continued expectation of a 65% decline in COVID vaccinations and related margins, the impact of which will be greater than the core business margin rate expansion. Therefore, factoring in both drivers, we are expecting the gross margin rate, excluding fuel and LIFO, to be down slightly in fiscal 22. In selling and administrative expense, we will continue to incrementally invest in our digital transformation, the Albertsons Media Collective, and the modernization of our supply chain, which will increase our SG&A rate in fiscal 22, but drive growth and productivity longer term. As an example, productivity tailwinds are currently substantially offsetting a significant increase in hourly wages and benefits for our frontline associates in this year's outlook. That brings us to adjusted EPS, which we now expect will be in the range of $2.80 to $2.95 per fully diluted share, up 10 cents versus previous guidance of $2.70 to $2.85 per fully diluted share. To support this outlook, we expect capital expenditures to remain in the range of 2 to 2.1 billion. Additionally, as it relates to productivity, we are on track to deliver against our three-year commitment of 1.5 billion by the end of fiscal 22 and are already beginning to roll out action plans to deliver the incremental $750 million between fiscal 23 and fiscal 25 that we shared with you last quarter. And finally, I'd like to provide a brief update on our ongoing review of strategic alternatives. While we have not yet reached a conclusion, we are pleased to share that as part of the review, our third party appraiser has completed our FIREA-compliant real estate appraisal, and the overall value of our real estate portfolio has increased $2.5 billion to $13.7 billion, representing a $4 per fully diluted share increase in asset value on a pre-tax basis versus the 2019 appraisal at $11.2 billion. I will now turn the call back over to Vivek for closing remarks.
spk09: Thank you, Sharon. We are pleased with our first quarter results and the momentum we are seeing today. As we look ahead to the balance of the year, we are thoughtful about the macro environment and the possible implications it could have on consumer behavior. Our top-tier performance over the last several quarters, even with periods of high inflation, has demonstrated we are a stronger company today than we were pre-pandemic. And the initiatives that have driven our strong results give us confidence in our future. First, our customers for life strategy is working. We are adapting quickly and we're executing well. We are adding customers and engaging customers more frequently through our loyalty program and our e-commerce offering. Customers spend more with us and stay longer with us because we're able to tailor assortment and promotional offers for them. We are giving customers great value choices by adapting our fresh offerings literally every week in every market and through our strong own brands portfolio. Our stores are operating more effectively and efficiently as our supply improves and our new technologies take hold. And we are proactively managing our costs. Given recently settled collective bargaining agreements, We have visibility into our labor costs into the future. And our productivity programs, both old and new, continue to allow for investments and provide the insulation for our earnings commitments in the event the macro situation becomes more challenging. We believe this puts us in a strong position to continue to gain market share and sustain our track record of sales and earnings growth. I would like to again thank our 290,000 associates for their loyalty and dedication to our customers and communities. They are the ones who make all of this possible. We will now take your questions.
spk14: Thank you. Ladies and gentlemen, thank you for joining us for the Albertsons Company's first quarter 2022 earnings conference call. We will now be conducting a question and answer session. If you'd like to ask a question, you're welcome to press star then 1 on your telephone keypad. A confirmation tone will then indicate that you are in the question queue. You may press star 2 if you'd like to leave the question queue. For the participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star key. The first question comes from John Heinbocker of Guggenheim. Please go ahead.
spk00: Hey, guys. I want to start with how you think about the market share opportunity from food away from home, right, you know, in an environment where menu prices continue to go up. I don't know if you can size that opportunity in your mind. How much of that will be driven by ready meals, right, versus ingredients? And how do you kind of go out and maybe market differently in this environment to educate consumers about your offering?
spk09: Hey, John. Good morning. John, here's how I characterize what we're seeing in the market. I think I would argue that consumers are still eating a lot at home, right? And possibly because they're working at home, possibly because of some of the things you pointed out about inflation outside in restaurants. Sometimes it's hard to get into restaurants. And the way I see that is because of the portfolio. If our ready meals is doing so well, we just launched a sandwich program. And the sandwich program, the store-made sandwiches, they're doing so well. And our convenient salads in our stores are doing so well. So we think there's one of two phenomenons happening. One is people working at home and picking up things to have lunch at home, to convenient things so that they can have a quick lunch at home. And we also see the types of things that you would buy if you were cooking at home. All the meat programs that we have, oils, the things that you would use to cook at home. So we still see that trend going. And I think everything we're doing in the app to enable meals, to provide more meals, is also working for us. If you go to our app, we just launched a meal capability app. where you can pick your meal and it populates the items that you want, and we're seeing a lot of traction in things like that, John.
spk00: Okay, great. And then maybe second, totally different topic, maybe share your philosophy or what you can share the board's philosophy with regard to real estate ownership. You mentioned the $13.7 billion. A lot of big box retailers view real estate as, strategic value for control reasons and a lot of other factors. What's the philosophy on your end as to ownership?
spk13: Thank you, John. Our philosophy on real estate is exactly the way you described it, which is that we believe that the real estate we have is a strategic asset for the company and There has been a history in the company of occasionally having a transaction where they might do a sale-leaseback of a percentage of the real estate that we have. That was about three years ago. I believe the last time they did that, and it was relatively small. But despite having the real estate appraisal, you know, we are very excited to see how well we've invested in the real estate. You saw that we were up about $2.5 billion, which if you put that on an asset value to the stock price on a pre-tax basis is about $4 a share. So it was an impressive increase in the valuations. But we do recognize the strategic value of the real estate and we'll be very thoughtful about that as we continue to consider all of the strategic alternatives that we have in front of us.
spk00: Okay, thank you.
spk14: Thank you. Ladies and gentlemen, just a reminder as well, if you'd like to ask a question, please contain a question to one and one follow-up. The next question comes from Simeon Goodman. of Morgan Stanley.
spk18: Hey, guys. This is Michael Kessler on for Simeon. Thanks for taking our questions. I wanted to ask first about inflation and units or consumption. How did both of those trend in the quarter, I guess even sequentially or incrementally versus what you were seeing a few months ago? And then thinking about the pass-through of higher costs, into retail pricing, how that's going, if there's any changes in how you're viewing that pass-through dynamic and what you're seeing from the competition, and then any sense of inflation outlook the rest of this year and potentially even into next year as we're starting to hear a little more speculation about maybe some commodity deflation coming in.
spk09: Hey, Simeon. First, if you don't mind, let me just give you a little bit about the consumer backdrop that we're seeing, because that's important for me to characterize what we're then seeing with inflation. I don't want to generalize, but I'll say there's two things that we're seeing. One is the consumer is clearly trading down. And so you can think of in rice, beans, oils, buying bookings and sort of arrangements and so on. And so we're seeing that on one hand. But the good news is they're trading down into a lot of our own brands on that front. The second thing I'll point out is that we have consumers. I'll characterize the consumers, again, not every segment, but there are consumers who have cash but are very value conscious, okay? And so the behavior we see from them is they're buying more, they're trading down on deli meats, but they're also buying a lot of store-made sandwiches and meals. They are buying more hamburger, but they're also buying organic meats. They're buying premium beer, and people are buying lower-priced beer. And instead of buying one avocado, they're buying bags of avocados. So we're seeing this behavior where people are value-conscious but are willing to spend on the things that they care about. So when we think about, going back to your question, we're seeing the kind of inflation that you would expect in the marketplace, that you're seeing in the marketplace. I think retail CPI was like 10.9% or so for the quarter. And if you see our numbers, yes, we're seeing some unit decline. But I'll also tell you that our tonnage is better than our units because the bag of avocados is one unit, right, instead of three avocados that they had bought in the past. So we're seeing some of that. Our expectation on inflation, when we started the year, was that the inflation would moderate quite significantly in the back half of our calendar year, right? And we don't think it's going to moderate as quickly, which is why we've raised our forecast a little bit, as you see on the top line. But what we're seeing, though, is that the overall behavior of the consumer is that they're engaging on the bookends with us and in the middle. And we're working that. I mean, our assortment allows for that. If somebody wants the higher end of the product, they've got it. If somebody wants an opening price point, they've got it in our stores. And that combination is working well for us in driving units and margins. As you know, the margins are pretty strong when they start engaging in our own brand portfolio. Does that help, Simeon?
spk17: It does, yeah.
spk18: Thanks. This is Michael, by the way, Simeon. I didn't make the call, but all good. No problem. But that's helpful. Thank you. And maybe a follow-up to actually to John's question, who's asking about food away from home, maybe just a broader one on market share. There's the component of food away from home demand shifting into food at home, and then there's a component of people trading down within food at home, maybe to lower price or discount channels. How do you view your positioning – I guess, in the context of those two dynamics, which maybe to a degree are playing out. And if you can maybe speak to where you think the market share gains are coming from. We heard from one of the largest sellers of food in the country yesterday that they also think they're gaining share. So curious where you think it's coming from, too. Thank you.
spk09: Yeah, Michael, I'd say the first thing I'll note is that our market share is positive in food and MULO in dollars and units. And that last thing I said is very important to us, that we are gaining market share in units. When people are eating more at home, if they're in fact trading out of food away from home, trading into food at home, and they're eating more at home, the fresh portfolio really, really matters. And so we think we are gaining market share first because people are coming in for a broad, fresh portfolio. People are coming in for the bookings of the assortment. If that's what they choose, we've got it. And so our observation is that we're gaining market share purely within the world of retail, and it's going to be very locally from all the competitors that we track locally, Michael. And I think you know the names.
spk08: Yep, got it. Okay, thank you, Vivek. Appreciate it. Good luck. The next question comes from Paul Ligres of Citi.
spk03: I just want to be clear on that 6.8% ID sales number. How much of that was passing through higher prices to the consumer? And then just ask my follow-up now. Performance of own brands, what was the increase overall compared to that ID sales number and You said that it performed, the own brands outperformed national brands in several categories. Curious where own brands are outperforming versus underperforming and what you think makes up that difference. Thanks.
spk13: Do you want to speak to the own brands?
spk09: I'll speak to the own brands. Paul, here's how, on the own brands, what happens in these markets is if a national brand is not a strong national brand, people migrate very quickly to the own brands. So you'll see So categories like oils and shortening and rice and beans and even in some meats and your deli meats and so on, we're starting to see people move very quickly to their own brands. I'll remind you that our own brand portfolio is 1,000 basis points better margin than national brands. So even a small movement into own brands makes a meaningful difference into the in our gross margins. I think own brand penetration went up 30 bps this quarter. So that's a substantial change and the contribution to the gross margin.
spk13: And then your question, Paul, on the 6.8% IV sales. Clearly, Vivek mentioned that retail CPI was in the high tens for the quarter. And we anticipated coming into Q1 that we would start seeing some breakage in units as well as government stimulus has been rolling off. So all of that contributed. Market share gains contributed to the ID sales as did the opportunity for us to continue to grow the own brand business. We did go up 30 basis points, our penetration. on own brands went up from 25.5% last year up to 25.8% this year, and we expect that to continue going forward. So that is the answer on your 6.8%. Of course, inflation helped drive that number. Some of the offsets were some breakage in units, and we also saw government stimulus go down.
spk08: Thanks, Sharon. Thanks, Rebecca. Good luck. The next question comes from Edward Kelly of Wells Fargo.
spk02: Hi. Good morning, everyone. I wanted to go back to the volume question and the question around sort of elasticity. You know, it does look like this quarter, you know, with double-digit inflation, elasticity picked up a bit. You know, curious as to whether, you know, that's what you are seeing as well. I know you mentioned sort of tonnage. But then as we, you know, look forward now and we think about decelerating, you know, inflation, you know, we looks like we could be entering a period where they're, you know, very low comp growth. And I'm curious as to how you think the industry acts in that environment from a promotional standpoint and how, if at all, it would change how you act from a promotional standpoint.
spk09: Yeah, first, Dan, I think that Inflation is decelerating, but there's still inflation, right? I think we should remember that. And it may not be 10.9%, but remember, we've operated a business historically that has been 1.5%, 2% inflation. And we think as a business, we're so much stronger than pre-pandemic that even at 1.5%, 2% inflation, we're going to have much better comps. than we went into the pandemic with. So fundamentally, I think there's more strength in the business to do that. But the inflation is going to be slightly higher than the old numbers, I think. The second thing, in terms of elasticities, the elasticities, if I go back to my history in this industry, in CPG and so on, the elasticities are so much better than we typically used to see in the past. But that said, there are elasticities. I think that it's showing up in two ways. One is maybe people buying a little less of something or clearly people trading down. I would expect that if that's the behavior, then people will trade back up or buy back more if the inflation starts dropping. So if it goes one way in one direction, it'll go the other way in the other direction. And so my sense is the volumes will also start coming up as the inflation moderates. And then I think the other thing I'd point out is that Everything we are doing is driving stickiness. We are very deliberate about saying when we get a customer, we want to engage them, keep them, get them to spend more with us. And what's helping us do that is the digital engagement that they have and the e-commerce business that continues to grow. Once we get them, we're able to personalize and keep them. And that's a market share gain that's working for us.
spk02: Share a wallet. Okay, and then I just wanted to pivot, and this question maybe is for you, Sharon, but if we look at SG&A or OpEx dollar growth this quarter, it was about 5% or so, and I know you're making investments into the business. There's obviously been some stuff that's happening from a labor standpoint on contract renewals. How do we think about SG&A dollar growth, both for the rest of this year and then You know, even sort of like going forward, you know, with things like labor rate inflation that gets sort of embedded into contracts, that type of stuff. Just kind of curious as to how we should be viewing the growth of that line.
spk13: Yes. So, Ed, we do anticipate continuing to invest in several key areas. Digital and omni-channel, of course. We're also investing in the Albertsons Media Collective, which, of course, is a longer-term revenue driver for us. But today we are just beginning the investments in the Albertsons Media Collective, and then the modernization of our supply chain, which is going to bring us substantial cost savings in the future. So those are the big areas where we are investing in SG&A and in the outlook that I gave on adjusted EBITDA for the year. I gave a little color on SG&A, and those were the areas that we said we would invest. And we did expect that in the back half, by the end of the year, that we would have a rate fee leverage on SG&A due to those investments. Q1, we leveraged the rate, but that was heavily driven as it laid out in the press release by significantly lower COVID-related costs, and those are nothing to do with the vaccine. We're talking about the cost that we incurred in Q1 of 21 in our stores. So that was the rate leverage in Q1, and that was Q1 last year was our largest quarter of COVID store-related investments. So I anticipate in the balance of the year to continue to see us make these investments. And I expect these investments, by the way, to bring us returns. Now, offsetting that, which I also said in the prepared remarks earlier, is productivity. We saw the highest increases we have seen in frontline labor in our history, quite frankly, in 2022. And yet, Our productivity savings that we are continuing to identify and capture have virtually offset that increase this year, and we expect to continue our productivity programs, which I also mentioned. We just announced last quarter another $750 million productivity program from 23 to 25. So while we are making these investments, we are also funding the investments through productivity. and expect to continue to identify increasing productivity, and many of the investments by their very nature will create productivity.
spk08: Great. Thank you.
spk16: The next question comes from Rupesh Parag of Oppenheimer. Good morning. Thanks for taking my question. So I wanted to touch on the promotional and competitive backdrop. Are you guys seeing any changes of note right now on the competitive side? And then as the year progresses, just given increased consumer sensitivity, do you expect it to become a more promotional environment later this year?
spk09: Hey, morning, Rupesh. No, we're not seeing a material change in the marketplace on that, Rupesh, but I've said this before, and I think we're not going to come out of this going back to the old form of promotional intensities. And the reason behind that is I think all of us are, one, better at the use of technology, and we're all much more digitally engaged in our promotions. And so, yeah, we are promoting, but we're promoting very deliberately in an extremely targeted fashion to giving people the promotions that matter for them. And you'll continue to see that, in my opinion, right, as we go forward. The other thing is I think you should also know that While supply is better, supply is vastly improved, supply is not where it used to be, right? And in many categories, we've all got to a steady state of managing it, and that's also going to throttle promotions to quite a bit or quite an extent over at least the next six to eight months.
spk16: Great. And then maybe one final question. Just on the e-commerce front, one of your competitors called out changing consumer behavior, I think, towards more pickup. Are you guys seeing the same thing on the e-commerce side, shifts in consumer purchasing behavior online versus in-store?
spk09: Rupesh, did you say pickup?
spk16: Yeah, like pickup versus delivery.
spk09: Yes. I'll tell you two things that we've always believed in, that pickup matters and speed matters in delivery. And so the two things that are working for us is, one, we've got more pickup in our stores, 2075 stores at the end of Q1. But we've also expanded two-hour delivery and same-day delivery. And we're getting tremendous traction with two-hour delivery with customers. And the nice thing about that is we're leveraging our stores to do that. Sometimes it's just putting a wear room in a store to do that, which is a very low capex. I mean, it's more shelving in the back of the store for the fast-moving items. And those two things are working for us.
spk08: Great. Thank you, Apostolong. The next question comes from Kim Goldman of J.P.
spk15: Morgan. Hi, thank you. Sharon, do you have an update on how to think about which of your multi-employer pension plans might be backstopped by the government? I think the U.S. recently put out some papers on this subject, but I might need some kind of advanced degree to fully understand them. Just curious if you have any additional thoughts at this time.
spk13: Yes, so we do have an update. First of all, what you're speaking to, Ken, and thank you for bringing it to everybody's attention, is the American Rescue Plan Act. It's called ARPA. And it was, during COVID, it was put out there to provide special assistance to keep these multi-employer pension plans solvent. So we participate in about 90% of those plans. Now keep in mind that we do not have liability for these plans. And that is the most important thing to take away from this. But for those plans that we participate in, in the 10-K we disclosed that we had about 4.9 billion, there was 4.9 billion of liability in those plans. And after tax, it was about $3.7 billion. And as we look at this, we have already started to receive, we've applied and received funding for that. And we anticipate that of that liability, about half of it would be covered by ARPA, up to about half of it would be covered by ARPA. So yes, it is out there. It got settled. It's acting and moving forward. And again, we have 16 plans, which is 90% of our underfunding that is in that category.
spk15: That's very helpful. Thank you. And then, Vivek, more of a broader question. You said in your opening comments, and I think you say this consistently, but you said that Albertsons faces a challenging operating environment. And I do appreciate that by nature, the industry you are in is perpetually challenging, but I guess I'm not quite sure why today should be considered particularly tough, right? You have rational competition. You have actions that are taking share. You're offsetting high labor inflation with productivity, low elasticity. I guess one of the questions I get sometimes is why aren't these considered the good old days, all things considered? It wasn't that long ago that supermarkets were losing a lot more share to mass. We had a historically high level of deflation. So Sorry to be overly wordy, but I'm just curious what's challenging today relative to prior years in your mind.
spk09: Ken, good morning. I think here's how I characterize it. You're right. I think our sector and we in particular, we are doing really well relative to where we were pre-pandemic. The pandemic and the initiatives that we have in place have accelerated so many different things we're doing. We're gaining customers. We're keeping them. Our portfolio is working. We're better at execution. You know, we're driving stickiness. Our NPS scores, I mean, we just, you know, our pharmacy, NPS scores last year 54, now 81.5. And guess what? We're adding scripts every day in our pharmacy. So there's a lot of things going well. What's challenging? The challenging part is the uncertainty. And the way we have to deal with that uncertainty is by being incredibly local and incredibly nimble. And I'm so proud of our teams for doing that, right? And that's one challenging piece. The second challenging piece is, you know, Ken, we all thought COVID's going away. It's not yet. So we still have it hanging around. It causes disruptions. It's causing disruptions. And it's not like it was before, but we still have those uncertainties to manage. That's the part that I characterize as challenging. And we don't know where, I mean, this inflation so far, I think because of our portfolios. And the way we're executing, we are managing through this inflation very well. And I think we all have in the back of our minds how the consumer might behave if this thing keeps going, right? So those are the types of things we're navigating. It's more the uncertainty than anything else.
spk08: Great. Thanks so much, Vivek. Thank you, Kevin.
spk14: The next question comes from Michael Montani of Evercore ISI.
spk01: Hey, good morning. Thanks for taking the question. I wanted to ask if I could, first off, in terms of the ID sales, could you just clarify, was the actual number of transactions up or down in the quarter?
spk13: Yes, in order to drive those IDs, we don't quantify, but transactions were absolutely up.
spk01: Okay, got it.
spk13: And we talked about the fact that we are seeing a return Michael, of in-store traffic.
spk09: Yeah. Adding households and adding transactions.
spk01: Understood. And then if I could just follow up on the guidance for a moment. So for the next three quarters, it looks like it's implied about a $200 million decrease in EBITDA year-over-year versus the $100 million increase year-over-year in 1Q. Okay. and understand there's cross-currents going on, you know, obviously lower ID sales as well, but just help us to walk through that in terms of, you know, the productivity agenda sounds good, but then also, you know, you've got basically less incremental volume, you know, forecast, so is it consistent promotionality that you're assuming through the year, and just kind of why is that the right outlook?
spk13: Yeah, keep in mind, Michael, that COVID vaccination, 65% reduction in COVID vaccinations in 2022 versus 2021. And recall that there was a big increase that occurred. Q2 will be our smallest quarter in 2021. But then Q3 and Q4 started to re-escalate. And that is hitting us very hard in Q3 and Q4.
spk08: Okay. Thank you for that. The next question comes from Scott Mushton of R5 Capital.
spk06: Hey, guys. Thanks for taking my question. So I guess I wanted to look at when I think about the pushback in owning Albertsons, right, really from the IPO, pensions which which recovered already and i think that's obviously a big plus you know the ownership overhang which i think you guys uh addressed a little bit and then the third and was a major one was pricing um you know everyone and this hasn't come up really that much on the call um but it does seem that you guys continue to invest um part of your savings and narrowing the pricing gap um at the same time and i don't know how long it's going to last you know certain competitors clearly have enormous pressures on their business, whether it be an omni-channel build-out or a general merchandise problem. So how should we look at this pricing gap as you go forward? Do you think it's something you can continue to narrow and kind of take that off the table as a concern, or is that something you think is going to widen out again when the competitive environment changes?
spk09: Morning, Scott. Good morning. To talk about pricing, first you've got to believe that you're going to have gross margin stability in the business. We've always talked in the past about having tailwinds on gross margin. For example, assortment. More of our own brands, more store-made products that we sell, the better the gross margins. Promotions. We're putting a lot more technology into our promotions. It's a lot more personalized. That's a gross margin tailwind. Operations. Reducing reducing our shrink, right, through technology in production, technology in produce ordering, technology at the self-checkout. You know, we thought we'd optimize it. Now there's technology that will really shrink at the checkout. Cost of goods. We're rolling out a lot more merchandising buying. You know, we're even finding reduced costs in our own brand's portfolio and the supply chain. So the first thing is we need to have a lot of confidence in our gross margin. By the way, we're also automating our supply chain, DCs. So we need to have it. But we have it. Everything I told you are initiatives that are in flight. Some are late. Some are early. But we look at the ability to deliver tailwinds as we look into the future. We combine that with being extremely surgical about where we invest in price. And the metric we're always looking at is are we gaining market share in dollars and units, food and MULO? And where we feel that that is out of kilter, we invest in price. And so that mechanism will continue only because we have all of this I just talked about to continue to do that, Scott. So there's no – we don't believe in going and making large-scale changes. We just don't think that pays off. And by the way, we offer a set of things in our store that we think comprehensively provides value to our customer. And it's that combination that matters.
spk06: And so as a little, thanks for that. So as a follow up, and then I'll, you know, you guys have been gaining share now, gosh, you know, I guess a couple of years consistently. If you had to kind of say, you know, answer the question, I guess, you know, most investors clearly don't believe it's going to happen because the stock doesn't really want to move up and this valuation is real low. You know, why do you think it's sustainable? And why do you think it's happening?
spk09: Why is the share gain sustainable? Well, Scott, I think there's a few things working right for us. One is it always starts with having a great portfolio. And our portfolio works in many, many different environments. So now we're in an inflationary environment. I think there was concern whether our portfolio will work. Actually, it works because we can give people those bookends. right, those who choose to stay with organic beef and buy hamburger. You've got it. You've got it in our store. The second thing we do, I have to emphasize that, you know, while I'm giving you general statements, the magic is local. You cannot win in this market if you're not working it on a store-by-store basis, locality-by-locality basis, and optimizing to it. And that's our heritage, and the teams are doing that. The third thing is driving stickiness. We take that extremely seriously, which is why we want people to engage more digitally because we can drive more stickiness, whether it's a loyalty program or an e-commerce program. And the fourth thing is this is underrated, but it's just great everyday execution, right? The NPS score in Rx I gave you is just good old everyday execution, just getting better so the customer says, hey, I'd rather come here for my scripts than somewhere else. And all of those, you know, we still think we have plenty of headroom in everything I just said.
spk13: And I would just add to that that the other thing to keep in mind is at the end of Q4, we gave you a metric on our Just For You loyalty members. We had gone up 45% to 30 million Just For You loyalty members, and then coming into Q1, we just increased another million to 31 million Just For You loyalty members. And if you go back and reflect on Vivek's prepared remarks, what you'll see is that as these Just For You loyalty members mature, as an example, when they become omnichannel, Over time, they come to be spending three times more than the in-store only shoppers, are actively engaged. When they become actively engaged with us, they become four times more than an average shopper, spenders in our stores. And nobody joins just for you and becomes either one of those immediately. It takes time and it grows over an extended period of time. So as we continue to gain these members, and then we have the pandemic significant increase in those members, and what we have been most pleased with is the retention of those members. And as we do that, that helps fuel ongoing share gains because these customers become more and more valuable. We continue to gain share of wallets from those customers in addition to attracting new customers to the brand. And that provides a very significant tailwind to the issues that you've mentioned about continuing to gain market share over time. And these are some of the moats that we feel like we have been able to build over the last couple of years in order to create the environment that can make that share gain environment sustainable.
spk09: I'll just close up with this thought that, you know, to do all of this, you need capacity to invest. And that's where our productivity program comes in. Our first 1.0, if I can call it, the 1.5 billion, going great. We talked to you about the next launch of productivity. It's off to a great start. And so we feel we continue to have the ability to drive productivity and invest in the things that drive growth.
spk08: Fantastic call, guys. Really appreciate that. The next question comes from Robert Moscow of Credit Suisse.
spk05: Hi. Thanks for the question. Maybe trying to get, Vivek, into inflation from a different perspective. Do you expect sequential inflation in your next quarter? Like, do you expect prices to be sequentially higher? And what's driving it? Are you still seeing vendors come to you asking for more pricing? And if so, you know, are you more, are you less amenable for that given what's happening in the commodity markets or not?
spk09: Yeah, so Rob, here's how I characterize it. The broad answer to you is yes. We'd expect sequential inflation, but at more moderated levels than we're seeing. So if early in the year we had expected that we'd lap it and we'd lap it and inflation would moderate very significantly, we are, less sure about that now. So if I was to characterize what we're seeing, one, on the one hand, you're seeing commodity prices decreasing. But on the other hand, we also expect that things like produce and others will come in a little higher because fertilizer costs are up. And that's the crop that people have already put in the ground. And so when we harvest that, we're going to see some prices. So net-net, we're seeing signals on both sides today. And then some CPGs are coming forward with price increases later in the year. Of course, we will continue to challenge all of that because we do our own clean sheets on what something should cost, and we'll continue to challenge that. But net answer is we do expect some sequential inflation, even if moderated through the rest of the year.
spk05: Okay, great. A last question. I didn't hear anything about supply chain disruption being an issue in the quarter. are you still experiencing that, or is that tamped down a lot? And as a result, are your shelves full, or are you still not getting everything you need from your vendors?
spk13: We are definitely still seeing supply chain disruption, and we still have categories where we are on allocation. So those issues have moderated. They are in no way passed. And from a supply chain operation standpoint, we have been hiring better and we've been more able to find labor. I'm not saying it's solved. It seems to have mitigated. And on the transportation side, that continues to be a challenge. But again, moderated but not fixed. So I think all of us as an industry would say we've seen some relief. but it is not at this point where we would call it being significantly better.
spk11: It is moderating.
spk09: It doesn't make us proud.
spk11: Yes.
spk09: Good.
spk11: We have time for one last question.
spk14: Thank you. The final question comes from Greg Vandishadana of Wolf Research.
spk04: Good morning. This is Spencer Hennis. I'm for Greg. One of your biggest competitors is increasingly passing through pricing courses on food and consumables to manage the markdowns that they're taking in general merchandise categories. Just curious how you think that's going to impact the competitive environment in grocery, and do you think your peers are going to take the opportunity to also bring up prices?
spk09: I've got a question again.
spk11: General merchandise, one of our biggest competitors.
spk05: Yeah.
spk11: Yeah.
spk09: Yeah. Yeah, hey, I don't know. I can't speak about what might be happening in somebody else's business, but I can tell you that I think everybody is feeling that the food business is doing well, right? You're seeing that across the markets. Even if you saw some of the earnings calls today, you'll see that the food businesses are doing well. And my sense is that for some of the things I talked about earlier, It'll be really hard in this environment to drive down prices and expect massive uptake in volumes only because supply is challenged and people are looking for different things. It's not just about going in and buying a packaged good. People are looking for a full portfolio to solve their challenges and meet their needs today.
spk08: Got it. That's helpful.
spk04: And then I totally understand that the fill rates remain challenged and that's concerning promotions for now. But if we start to see fill rates pick up and then we see unit trends decelerate further in the second half and into 2023, do you think the promotions are going to remain as rational as they've been over the last 12 days and months there?
spk09: Yeah, it's still as rational. Again, I go back to, you know, if you go back to the past, the old behavior in our sector was that we would all run an eight, 10-page ad and blast promotions that didn't give us a return. And that was what diluted gross margins in the past. I think there's plenty of technology and data and digital access and so on today to become much more targeted and get a better return on promotion. And so far, I still find it rational. I suspect that, I talked to you about the fill rates. Just to put it in perspective, You know, in some of these categories, we're at 65% service level and feeling good because it's better than 35, but 65 still sucks, okay? So I think we've got a long way to go before we get completely comfortable as a sector on supply.
spk13: And we've said consistently that with the pricing, promotion, data analytics investments that the entire industry has been making over the last several years, We believe that it is the tide that raises all boats. This isn't a specific Albertsons discussion. We believe that this discussion applies to most of our sophisticated competitors, that through personalized promotion, it is why the media collectives are doing better. Vivek talked about the fact that the suppliers and the retailers together have realized that the effectiveness of promotions can be so much greater when you can personalize and you use data analytics to drive it. And so I think that over the last couple of years, if you take a look at the investments that we've all made in those capabilities, they have changed the game and to just give away margin, I just don't see that behavior coming back into the industry in the way that we saw it pre-pandemic.
spk11: Okay. Thank you very much for participating in today's call. We look forward to speaking with you over the balance of the day and the rest of the week. Thank you. Thank you all. Thank you.
spk14: Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you for participation. You may now disconnect your line.
Disclaimer