Albertsons Companies, Inc.

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.

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.

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.