Albertsons Companies, Inc.

Greetings and welcome to the Albertsons Company's first quarter 2025 earnings conference call and thank you for standing by. All participants will be in a listen-only mode until the Q&A session. This call is being recorded. I would like to hand the call over to Cody Perdue, Senior Vice President, Treasury, Investor Relations and Risk Management. Please go ahead, sir.

Good morning. Good morning. And thank you for joining us for the Albertsons Company's first quarter 2025 earnings conference call. With me today are Susan Morris, our CEO, and Sharon McCollum, our president and CFO. Today, Susan will recap the first quarter of 2025 and update you on our progress against our strategic priorities. Then, Sharon will provide the details related to our first quarter 2025 financial results and our outlook for the remainder of fiscal 2025. before handing it back to Susan for closing remarks. After management comments, we will conduct Q&A session. I would like to remind you that management may make forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, the factors identified in our findings with the SEC, 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. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these financial measures to the most directly comparable GAAP financial measures can be found in this morning's earnings release. And with that, I will hand the call over to Susan.

Thanks, Cody. Good morning, everyone, and thanks for joining us today. In the first quarter, our teams delivered solid results with IT sales growth of 2.8%, adjusted EBITDA of $1.11 billion, and adjusted earnings per share of 55%. These results, again, demonstrate gradual and incremental progress against our five strategic priorities, which include driving customer growth and engagement through digital connection, growing our media collectives, enhancing the customer value proposition, modernizing capabilities through technology, and driving transformational productivity. Within these priorities, our four digital platforms continue to be the catalyst for customer growth and engagement. We continue to drive increased sales and to more deeply engage our most loyal customers, all while generating data and insights for the media collective. Our first digital platform is e-commerce, which grew 25%. and reached 9% of total grocery revenue in the first quarter. This growth was again led by strong performance in our first-party business, driven by award-winning capabilities in our fully integrated mobile app, and supported by our five-star certification program. Our focus on delivering exceptional customer service experience is fueling new customer acquisition and strengthening existing customer retention. To do this, we're continuing to enhance our digital shopping experience. including the introduction of AI and interactive features that deliver both ease and convenience. For example, we launched our new Shop Assist feature, which enables a connected shopping experience that allows customers to communicate back and forth with our in-store associates throughout their orders fulfillment process. We've also created more flexibility in our basket building. Customers can now add items to their orders up until picking has started. recognizing that shoppers often think of one more item they need just after an order is placed. While our e-commerce penetration is still low industry peers, it is one of our biggest growth, customer acquisition, and customer retention opportunities for 2025 and beyond. From a profitability perspective, our e-commerce business is near break-even and improving. Our second digital platform is Loyalty, which grew 14% to 47 million members in the first quarter, as we capitalize on simplification of our program and further enhance the value the program offers. Members in the program today are engaging more frequently, using more of our easy-to-understand and redeem features, and spending more with us. As taken point, 30% of our engaged households are now electing the cash-off option, reinforcing the customer's desire for immediate value. As we did last quarter, loyalty is a key enabler of digital customer engagement. and a rich source of data for our media collective. Throughout 2025, we will continue to introduce compelling benefits that will attract new members, improve share of wallet, and further enable marketing and monetization opportunities for the media collective. We will also continue to simplify and expand the program to include strategic partnerships to offer even more value. Our third digital platform is pharmacy and health, which grew 20% year over year, driven by industry-leading script and immunization growth, best-in-class customer satisfaction scores, and the ongoing integration of pharmacy and sincerely health into our overall digital experience. Cross-shoppers between grocery and pharmacy are exceptionally valuable. Over time, these customers visit the store four times more often and buy significantly more groceries with us, resulting in outsized customer lifetime value across the entire store. For this reason, in addition to the market share opportunity competitor closings are creating for us, we're also continuing to invest in our pharmacy and health digital platform. Through this platform, we're also launching customized omni-channel benefits that are not only attracting new customers, but also converting existing pharmacy and grocery-only customers to become crop shoppers. It is also helping customers to find new and personalized ways to improve their health and well-being consistent with evolving national trends. Our pharmacy and health platform is an integral part of our customers for life strategy and a significant growth and customer engagement opportunity. For this reason, leveraging our growing scale to improve pharmacy profitability over time is a key operational priority. To deliver this, we are continuing to pursue higher margin service offering and drive productivity through improved sourcing, increased automation, and labor optimization. This quarter, we opened our third central bill processing facility, which is reducing our cost to serve while at the same time improving overall customer experience. The fourth usual platform is the integration of the mobile app for use in our stores. We're not just selling food. We're simplifying meal planning and making shopping easier and more convenient both in-store and online. RF has become the epicenter of the omni-channel experience, with digital customers engaging nearly three times a week on average. What began as a tool for enabling e-commerce and delivering great deals is now a swift organization of tools that makes customers' lives easier regardless of whether they're shopping in our stores or online. These tools include best-in-class list building and personalized meal planning capabilities, powerful search and product locating capabilities, and an in-store mode that connects meal planning and other store-specific capabilities. In our media collective in the first quarter, we significantly increased the high-impact digital inventory as our digital platforms work together to enrich our data and generate deeper customer engagement to accelerate growth and deliver superior return on ad spend. We'll continue to invest in building industry-leading integrated solutions that will support both endemic and non-endemic partners. These solutions include refining shopper audiences, running targeted media campaigns with compressed measurement timelines, and delivering consistent omni-execution to develop personalized relationships for our collective partners with our customers. These same solutions are also providing benefits for our internal loyalty and marketing initiatives. As we look forward, we expect the collective to grow faster than the retail media market and ultimately be one of the largest sources of fuel for reinvestment, into our core business over time. To improve our customer value proposition, we intentionally invested in value, in both loyalty and promotional offerings, as well as by partnering with strategic vendors to invest in price in certain categories in certain markets. We also surgically managed through the pass-through of cost inflation to further invest in the customer's needs for immediate value. While they do this early, These investments did deliver a sequential quarterly unit sales improvement and over time are expected to drive greater existing and new customer engagement across our banners. We additionally amplified our own brand's presence to drive further value for our customers. Own brand sales penetration finished the quarter at 25.7% as we launched new offerings across multiple categories. We also expanded the assortment in our recently introduced Overjoyed brand, and launched our newest brand, Chef Counter, a chef-inspired meal solution targeting foodies seeking fast and easy restaurant-quality choices at affordable prices. These launches, coupled with greater prominence and better value in OMRAN merchandising, is expected to drive greater loyalty, increase digital and omni-channel household engagement, and higher transaction counts over time. Our next priority is the modernization of our capabilities through technology. As we said last quarter, our North Star is to use technology in everything we do, and we are energized by the progress we are making toward this aspiration. Our technology-first focus is positioning us to make a greater impact faster, allowing us to drive greater innovation at a lower cost. Our advanced technology platform, on which we are continuing to innovate, powers our e-commerce, store, pharmacy, supply chain, merchandising, and media collective operations and is allowing us to leverage emerging AI technologies to accelerate our operational transformation going forward. We are also using our advanced capabilities to use AI agents to enhance many business functions, including pricing and promotion, personalization, customer care, and co-generation, among others. Threatening transformational productivity is our next priority, which is an imperative to fuel our growth. Our productivity engine continues to reduce costs, offset headwinds, and fund our growth priorities. It works hand-in-hand with our technology modernization, including our initiatives to leverage AI and data analytics, optimize supply chain costs through automation, and build up shrink and labor management tools, to name a few. In addition, the largest of our opportunities continues to be the leveraging of our consolidated scale to buy goods for resale through national lines and more efficient supplier relationships. As we previously shared, from fiscal year 2025 through 2027, we expect our productivity engine to deliver $1.5 billion in savings, which we plan to reinvest in growth and our customer value proposition, as well as to offset other inflationary headwinds. Before I hand the call over to Sharon for an overview of our first quarter and to provide an update to our 2025 outlook, I'd like to give you an update on recent labor negotiations. In fiscal 25, we have negotiations covering approximately 120,000 associates. As of today, we've reached agreements covering nearly half of these associates, with two pending ratifications in Colorado and Southern California. We appreciate and value our associates, and in these contracts, we are meaningfully improving wages and benefits. At the same time, we're working to negotiate contracts that are not only financially viable, but also provide the operational flexibility the company needs to streamline operations, manage costs, and offer affordable prices in a rapidly changing grocery landscape. Sharon, over to you.

Thank you, Susan, and good morning, everyone. It's great to be here with you today. As Susan shared, the investments we are making are delivering value to our customers and adding breadth to the capabilities we need to drive future growth. During the quarter, we saw early wins from these assessments, affirming our competence in our strategic priorities and our customers-for-life strategy. Included in these wins was identical sales growth this quarter of 2.8%, driven by 20% growth in pharmacy and a 25% increase in digital sales. We also saw a sequential improvement in core grocery units. To drive this growth, our gross margin rate of 27.1% was lower than last year by 85 basis points, excluding fuel and Michael expense. Incremental investments in our customer value proposition and the mixed shift impact related to the strong growth in our pharmacy and digital businesses drove this decrease, but was partially offset by benefits driven by our productivity initiatives, including improved shrink expense. Offsetting this growth margin investment was a 63 basis point improvement, including fuel, in our selling and administrative expense rate. This decrease was primarily driven by the leveraging of employee costs, reflecting the positive benefits from our ongoing productivity initiatives, and lower merger-related costs. Incident expense in Q125 decreased $4 million to $142 million, compared to $146 million last year. due to lower average borrowings. Income tax expense in the first quarter totaled 75 million, or 24.1%, compared to 69 million, or 22.3%, in Q1 last year. This tax rate increase was primarily driven by a reduction of an uncertain tax position last year that did not recur in 2025. Adjusted EBITDA was $1,111,000,000 in the first quarter compared to $1,184,000,000 last year. Adjusted EPS was $0.65 per diluted share compared to $0.66 per diluted share last year. Now I'd like to discuss capital allocation, the balance sheet, and cash flow. Consistent with our capital allocation priorities during the first quarter, We invested $585 million in capital expenditures, including the opening of three new stores and the completion of 36 remodels, as well as the ongoing modernization of our digital and technology capabilities. We also returned $401 million to our shareholders, including $86 million in quarterly dividends and $315 million in share repurchases. leaving approximately $1.5 billion in our existing multi-year $2 billion share repurchase authorization. At the end of the first quarter, our net debt-to-adjusted EBITDA ratio was 1.96. Now let me walk you through our updated 2025 outlook. As Susan said, we remained focused on our five strategic priorities. Through the balance of fiscal 25, we will continue to invest in our customer value proposition, customer experience, digital growth, the media collective, and health and pharmacy. These investments are expected to drive outside growth in digital and pharmacy, both of which drive higher future customer lifetime value but create near-term margin headwinds. We will also continue to drive our productivity agenda to fuel this growth. and offset inflationary headwinds. With that backdrop, we are updating our outlook as follows. We expect identical sales growth in the increased range of 2% to 2.75%, up from 1.5% to 2.5% last quarter. This assumes continuing growth in pharmacy and digital sales, as well as gradually increasing units in grocery. From a cadence perspective, we expect the second quarter ID sales to be towards the lower end of our guidance range with gradual acceleration in the back half of the year. We expect adjusted EBITDA to be in the range of $3.8 to $3.9 billion, unchanged from last quarter. As a reminder, this includes approximately $65 million in adjusted EBITDA in the fourth quarter related to our 53rd week. We expect adjusted EPS to be in the range of $2.03 to $2.16, unchanged from last quarter, and including $0.03 related to the 53rd week. The affected income tax rate is expected to be in the range of 23.5% to 24.5%, unchanged from last quarter, and capital expenditures are expected to be unchanged in the range of $1.7 to $1.9 billion. Looking beyond 2025, as we capitalize on the investments we are making behind our strategic priorities, we continue to expect fiscal 2026 to coincide with our long-term growth algorithm of 2 plus percent identical sales and adjusted EBITDA growth higher than that. I will now hand the call back to Susan for closing comments.

In closing, are customers for life strategies working? We're investing in our core operations and improving our customer value proposition. These investments are driving increased traffic and growing digitally engaged customers, omnichannel households, and loyalty members. To fuel these initiatives, we are driving productivity and leveraging new technologies to drive efficiencies across our operations. As Sharon said, we continue to expect 2025 to be a year of investments, including enhancing our customer value proposition. As a result, we expect gradual and incremental improvement in top-line trends in our grocery business in the second half of 2025, ultimately driving growth in line with our long-term algorithm of 2% plus identical sales and adjusted EBITDA growing higher than that in fiscal year 2026. With just over two months as CEO of Albertson's companies, let me say that I am more confident in our strategy with each day. I'm energized by the work our teams are progressing and excited to continue building on our strong foundation. To our 285,000 great associates, I am more inspired than ever by you and all that you make possible for our customers and our communities each day. No matter where you are across our business, you make a difference. You keep our systems running, ensure our products are in stock, and delight our customers. We will now open the call for questions.

Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. To allow for as many questions as possible, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Paul Lejouet with Citi. Please proceed with your question.

Thanks, guys. I'm curious if you could talk about the drivers of the gross margin decline this quarter, maybe five of them for us, and how we should think about each of them remaining a headwind for the rest of the year, which stay, which might go away, which become less of a headwind. Maybe you could start with that. And then also curious how you would characterize the pricing environment around you in the landscape. Thanks.

Thanks, Paul.

As I think about gross margins, so we've been very clear that our top priority is driving sales and specifically driving an increase in units, and we're investing in that and remain true to that. We expect to continue that, by the way, throughout the rest of the year. As we think about Q1, it was actually one of our largest overlaps year over year, and thus the compare that you're seeing from the gross margin investment. That said... As I mentioned before, we're going to continue to invest in margin, but we also expect our productivity to begin to provide a tailwind as our national buying gradually kicks in as the year progresses. Also keep in mind our focus is on gross margin dollars, on EBITDA dollars, and not on rate. You had a second question about the pricing environment, and I might have missed a question in the middle. And what we're seeing is continued promotional investments, From the competitive sense, of course, in our own operations, we're also leaning in more heavily on loyalty, on personalized deals. I would say that the pricing environment is rational, so we've not seen any broad swings across the industry at this point in time.

And I would just add to that that you're continuing to see pressure from Mavs, club stores, and the value players.

Thank you, guys. Good luck. Thank you. Our next question comes from the line of Leah Jordan with Goldman Sachs. Please proceed with your question.

Good morning. Thank you for taking my question. You made an interesting comment that e-com profitability is near break even and improving. Just see if you could provide more detail on the key drivers supporting that improvement. You know, how much is Albertsons Media Collective a factor at this point? And what's your line of sight into reaching breakeven in that business?

So, Leah, I think it's really important to recognize that different companies are calling e-commerce different things in their P&Ls. When we are talking about e-commerce, that is specifically our e-commerce business. There is nothing in our e-commerce P&L related to the media collective from a financial point of view. Of course, it creates data for the media collective, and it is a major provider of information for the media collective, but from a P&L point of view, it's pure. What is driving that is volume, first and foremost, leveraging the fixed cost of the operations of that business. Also, labor efficiency in the business. We've invested in tools and systems in order to drive efficiency in labor. And then we are also very much focused on continuing to leverage transportation costs in that process. So it's across the P&L where we're seeing improvement, but in that type of a business where you've got fixed costs that put the space in the stores, the real estate, because all that's allocated to that business. We are continuing to lever that, so we are getting very close to break-even in our e-commerce business.

Sharon, if I could just add to that as well, maybe you touched on this, a reminder that our fulfillment model is through our stores. Our stores are already in the neighborhoods that are serving our customers, so that creates efficiencies for us, perhaps, versus some others out there.

I think that's it. That's very helpful. Thank you.

And then I just had a quick follow-up on the ID sales guidance. I mean, just if you could comment on the cadence of ID sales throughout the quarter, and then with the deceleration that you're guiding into Q, just what are the key drivers of that? Are you seeing something change with the consumer? Is this related to the pharmacy business? Anything there would be helpful. Thank you.

Leah, there's a couple things. First and foremost, the compares on pharmacy. You have to look at pharmacy growth last quarter, which we disclosed. So if you take a look at that, that has a major swing impact on the comp each quarter. So look at that. Secondly, from a cadence point of view, we feel pretty confident that as we progress through the year, We expect to see on the grocery side of the business, we talked about the fact that we're expecting to see progressive units as we go through the back half of the year, thus the price investment that we have spoken about. So in Q2, we do need to keep in mind that there will be an impact from the strike that we had during the quarter. So that will have an impact, but we quantified that for you in order for you to help model. We said in our prepared remarks that we expected in the second quarter to be at the low end of our guidance range. So hopefully that will be helpful, and we continue to expect to see strong pharmacy in the numbers going into Q2.

Very helpful. Thank you. Thank you. Our next question comes from the line of Edward Kelly with Wells Fargo.

Please proceed with your question.

Hi. Good morning, everyone. I was hoping that you could maybe take a step back and update us on your price investment goals, just kind of given what you have seen so far. Customer response, does that give you any confidence maybe to lean in a little bit more? And then As you think about productivity initiatives rolling in and then you think about returning to your algo next year, is it your expectation that eventually you get to the point where you will continue to invest in price, productivity offsets, gross margin is a bit more stable? Just curious as to how we should be thinking about all that. Thank you.

Sure. Thanks, Dan, for the question. So as we think about price, just a reminder, as we went into the year, We have an incredible amount of data, and our price investments are very surgical. We know the categories and the markets where we need to make those investments, and we've begun that process. And also keeping in mind, too, that as we talk about investing in price, it's really investing in the total value proposition. So, yes, some of it's based pricing. It's promotional. It's investing in our loyalty programs as well, and, of course, focusing on our own brands. To date, it's still early in the investment process, so we'll be able to understand a little bit more. This is certainly a journey, not something that is a one-and-done. It will be an iterative process with multiple phases launching throughout the year. Right now, we've seen sequential improvements in our unit trajectory, which is what we expected to see. We have been tracking... are CPI versus the competitive set and are generally pleased with what we see. But once again, it's quite early in the process. You asked about productivity. And what I would say here is, as I mentioned a moment ago, there will be a tailwind from a gross margin perspective as we implement our national buying processes. But keeping in mind, too, that that is a process. We're working closely with our vendor partners, category by category, vendor by vendor, to So we expect to see that start to show through towards the second half of the year and expect to leave 2025 going into 2026, delivering on the long-term algorithm.

And then just maybe a follow-up on the pharmacy and grocery cross-shopping momentum. I mean, pharmacy has obviously been very impressive, but the grocery business has lagged. And I'm just curious as to what's happening with the momentum of that cross-shopping activity, what you're doing to get those customers to engage more in the store. And over time, I mean, it seems like we should expect the grocery ID to respond to all this. I'm just kind of curious as to how you are thinking about the momentum there and when that really begins to improve.

So as we've shared before, it does take time for our

the cross-shopping to begin between pharmacy and grocery customers. That said, we know what they do. They often visit the store four times more frequently. They drive outsized customer lifetime value. One of our goals with all of this is, of course, getting them engaged in both center store and pharmacy, recognizing that as they're engaging in the pharmacy side of the business, we are working to increase their engagement with higher service offerings. Test and treat is one example. Immunizations is another. From a grocery perspective, we did see positive growth in grocery in the first quarter, exclusive of our pharmacy business. So we were pleased to see that happening there. As I mentioned before, too, we're focused on creating incredible amounts of productivity in our pharmacy business, including improving our sourcing, buying better, increasing automation, creating solutions for our pharmacy techs and teams to make their jobs more efficient. We've invested in three central fill facilities in our Southwest Division, in Dallas, and in Southern Washington State, which are also helping our productivity. So, again, we like the total value equation when our customers engage with us in-store, in pharmacy, online. That's a virtual flywheel for us that drives ongoing growth. And productivity, by the way. So we're very excited about the future and believe in the priorities that we've laid forth.

Thank you. Thank you.

Our next question comes from the line of Rupesh Parikh with Oppenheimer & Company. Please proceed with your question.

Good morning, and thanks for taking my question. Just going back to retail media, I was just curious how that ramp is going versus expectations so far and just anything surprising at this point.

Hi, Rupesh. We are very pleased with progress that we're seeing on a media collective.

Our growth is outpacing the industry. Our team has done a phenomenal job of condensing the amount of time that it takes for us to be able to give feedback to our vendor partners on the performance of their investments. They're enhancing our digital properties so that we have more inventory to be able to sell. And we're also working on really creating more streamlined personalization opportunities so that our vendor partner is going to have direct connections with the customers that they're serving. So we feel good about our progress there. But we also see that it's a blue sky ahead. We recognize that we're catching up in some ways, and our goal is to leap forward. But there's great progress there from the team.

Great. And then maybe just one follow-up question. Just on the consumer, just curious what you guys are seeing right now. And with the recently passed legislation, just any thoughts on SNAP impacts?

I'll start with the SNAP impact. So for us, we have a lower penetration of SNAP than the majority of the competitors that we have. That said, that customer is very important to us. They typically have a larger basket. They're very loyal. And we'll work hard to make sure that they have the communication information they need to get access to those resources when available.

I would also add to that that when you look at the new legislation, There is a very long ramp to implementation of many of the things within that legislation. So in the short term, we don't anticipate that being a headwind of any material amount in the short term.

Thanks, Sharon. And on the consumer side, we continue to see the customer seeking value. We're selling more on promotion. That's been happening for quite some time now. We're leaning heavily into own brands. understanding that, and as we've mentioned before, we're proud of our own grants program that we have, but we're not satisfied with the penetration that we have. So we're really leaning in for the Q2 and the rest of the year. That's upside potential for us moving ahead. As I think about the cuts, we were looking at some category information, and it's been interesting. Some of our top-performing categories in the first quarter was kind of a tale of two cities. We absolutely saw increases and a shift in support and ground beef is one example. again, indicating that the customer is looking for value. We also saw strong growth in our deli chicken business, as an example, knowing that I think customers are always looking for quick and easy meal solutions. And with the increase of food away from home, I think inflation was almost 4%.

We're absolutely providing value there. Great. Thank you for all the color. Thank you. Our next question comes from the line of John Heinbuckle with Gruggenheim Partners.

Please proceed with your question.

Hey, guys. I want to start with, I think you said, maybe I heard wrong, food volumes were positive in the quarter, grew. Was that right? If so, is that predominantly traffic or items per basket? And then I think your goal, a couple of quarters ago, you talked about 50 basis points. Is that still a fair goal, or do you think you can do better than that?

Yes. So, John, traffic and AIV were positive. On the units, it is a sequential improvement in units from Q4 to Q1, and that is not yet a positive.

Okay.

And then a follow-up is, if you think about reference technology, Where do you think the most fruitful labor productivity opportunities are? I think about, because you guys are promotional, electronic shelf labels, thinking about that, thinking about automation back into the warehouses. Where are the biggest opportunities to move the needle on cost per unit?

John, thanks for the question. So you actually touched on a few that are very important to us today, one of which is DC Automation. We've had great success with recent launches and look forward to accelerating that agenda for a variety of reasons, efficiency being one of them. With regards to store labor, we have an incredible amount of data. And I think about e-commerce as one example where we've actually been able to enhance productivity because we're able to get the data that we need to create more predictive scheduling. That's really helping us create efficiencies there. That's already underway in the rest of the store, and we're in the process of actually – fairly robust in better store. We're working through the fresh departments, so wall-to-wall forecasting is what we call it, and that's going to be a big unlock for us. We are currently in pilot on ESL in, I think, 40 stores at this moment in time, seeing great results there. But to your point, we're absolutely leaning in heavily on technology and automation, tasks where we can, eliminating pain points across the organization and existing tasks. I'm looking forward to what we're going to learn from our experiments on AI across the company because we see further opportunity there for efficiency.

Thank you.

I can also add that over the last several years, we've invested heavily in our stores in several technologies that are used by a very large number of people in our stores. We implemented OpRush. We've implemented ordering and other types of technologies. And one of the big opportunities that every retailer has is the utilization of that technology. And there is a full court press within the company on execution in the stores and elevating that in our stores. So, we are expecting to see changes and continued improvement in the stores in the utilization of the tools we currently have. Another area that we continue to invest in, and you have to invest in it from two perspectives. One is the customer experience, and one of them is from a shrink perspective, but is in the self-checkout. And the various things we can do with self-checkout from a customer experience point of view. Using Vision AI as part of that process, we saw, as you saw in our prepared remarks, that we did have some favorability and shrink. Part of that, we believe, is coming from the technology that we have invested in self-checkout So that is another area that benefits you in labor in many different ways, but the key to self-checkout is making sure that that customer experience is as great as it can be, and we're spending time on that and ensuring that, and I believe that will help us continue to take self-checkout to the next level.

Thank you. Thank you.

Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Hey, Susan. Hey, Sharon. How are you? I wanted to follow up on pricing. Susan, I asked you about where your head is on pricing. I think you've lived in the high-low environment for most of your career. So curious what this iteration looks like. Are you moving to part EVLP with high-low pricing, And you mentioned, is this a one-time catch-up or this is iterative and, of course, open to changes down the road? And then I don't know what, in the conversations with vendors, how you're communicating some of the changes as you try to work with them on the central buying.

Thanks for the question. So first and foremost, I want to highlight the fact that, and I've mentioned this a couple times and we talked about this last time, we have an incredible opportunity with our own grid. Our penetration wells it's growing at 25.7% for the quarter, we should be at 30% plus. So we are leaning into that from both ends, both from a price perspective, but also from a cost of goods perspective so that we can fuel our own growth there. Going back to your price question in general, I would just, yes, you're right. We've typically been a high-low retailer. And if I had to describe our go-forward approach, I think we're more of a modified high-low. That's where we're looking to achieve. And, yes, it's iterative. This is absolutely not a one and done. And what the team has created, which is actually pretty fantastic, is certainly we've created a suite of tools that helps us utilize the data that we have to anticipate the changes that we're making based off of past performance of various price points, understand the customer elasticities, and then feed us what those pricing changes should be to optimize unit growth, optimize profitability. And those tools are only becoming more and more robust. We continue to add to the suite. So to answer your question shortly, no, this is not a one and done. This is a new go-to-market strategy. We are deeply engaging our vendor partners. That takes time, by the way. So as we talk about our productivity and the tailwind, that will come gradually over time as we're leaning into partnerships with our vendors to say, hey, how do we do this together? We want to move more units. We want to move them with you. How can we lean in and create the right opportunity to grow sales and share, unit sales and share collectively?

Okay. And then switching topics for follow-up, SG&A run rate. Can you talk about, I think it was up 3.5% or so. Union contracts, I'm sure it was part of your plan at some point because you know when they come up and you have some expectation. Can you talk about that? how the unit contract could or couldn't change that run rate and any investments that come in, and then, you know, managing it relative to where you think comps can come in. Is it in the right range so that you could eventually leverage when you get some of the unit pickup in the back end?

Yes. In our SG&A guidance in our outlook for this year, we have anticipated that what these increases could look like, and that is incorporated in the adjusted EBITDA values that we provided for the year. As it relates to other areas in SG&A that you didn't ask about, keep in mind this quarter we had a year-over-year benefit of about 63 basis points. Take a look at how much of that is one-time cost. You can see the one-time cost in our reconciliations. in the press release. So about half of that comes from the elimination of merger costs, but the rest of that has been driven by productivity. One of the big areas of productivity that we expect to see this year, early in the year particularly, is going to be in SG&A. Remember, we are materially changing our ways of working. We've had several announcements on the opening of our new headquarters in India for technology, which we're very excited about. We are also transitioning many of our back-end accounting functions to an existing location that we have in the Philippines, and that transition is also happening. So we are making several, we call them internally, ways of working moves that are helping to offset some of the pressure that we're seeing And wages, I don't want to specifically say union wages.

It's wages in general. Thanks. Good luck. Thank you.

Our next question comes from the line of Mark Cardin with UBS. Please proceed with your question.

Thanks so much for taking the questions. So on the pharmacy front, how did that contribution shake out from GLP-1s And then for the growth outside of GLP-1s, is it being more driven by newer customers or more by your engaged existing customers?

On the GLP-1 question, it's about half the pharmacy comp. So think about GLP-1 as half the comp. However, remember, it comes in an incredibly outsized average unit retail and script growth. actual script broke outside of GLP-1 was also very strong. Susan, do you have something you'd like to add to that?

Yeah, so, and Sharon touched on it, clearly the profitability is quite different on the GLP-1 script itself, but the customer is quite valuable. What we found is there might be an initial dip when they start shopping with us in their grocery basket, but that quickly turns around and actually leans into items like supplements, lean proteins in our meat departments, categories that are actually quite profitable for us as a company. Sharon mentioned our core script count XGLP1 is very strong, and that's, again, exciting to us as customers continue to engage in our total ecosystem. That adds profitability. That adds long-term lifetime value. So we feel very good about where we're at in the pharmacy space. That said, and I mentioned this earlier, we are very focused on productivity there. improving sourcing, increasing automation, and, of course, the central skill that I spoke of.

Great. And then on tariffs, I know that indirect impacts were a big unknown from the ingredient and the packaging standpoint in grocery and pharmacy. Now that we're a few months in, are you expecting this to be any more or less a contributor to inflation over the course of the next few quarters relative to what you were expecting last quarter? Thanks.

Thank you. And, yes, as we've mentioned before, yes, well over 90% of the goods we source are domestically based, but to your point, ingredients are certainly playing a factor in our CPG partners and their cost of goods. We're starting to see increases in cost of goods moving ahead, and we've got a very rigorous process of, first and foremost, quite frankly, just pushing back. We've worked hard, and it shows in our price position as well that we've not passed through all of the inflation that we're seeing from a cost of goods perspective. Our first line of defense, though, is to push back with our vendor partners, deconstruct the cost increase and make sure that we're all in alignment of the rationale behind it, looking for alternate sources of supply or other products that we can push if the tariffs become unwieldy, and then finally, in certain cases, if we have to, we'll pass them on to customers, but we're going to remain very close to the competitive set, especially on key items. When I start to think about commodity items that come through, which is something we do every day, by the way. You know, this is part of our DNA. We sell a lot of commodity-driven items, and we are very agile in the pricing process there.

And Susan, I would just add to that. It is also having us take a look at what we are offering in our brands. So as we look forward and we look at the tariffs, it may be that there comes a point where we decide – that an expansion in our assortment and own brands is a great solution for our customer, and we're looking at that as well.

Great. Thanks so much, and good luck. Thank you. Our next question comes from of California with BMO Capital Markets.

Please proceed with your question.

Hi. Good morning, Susan and Sharon. Thanks for taking our questions. Wanted to go back to the sequential improvement in grocery units. It sounds like you were pleased with that. Just want to clarify, would you expect that to continue into Q2 and it's just a pharmacy dynamic there in Q2? Just wanted to understand really what underpins that confidence regarding the stronger second half IDs and what's the measure of that? Is that more of a grocery unit dynamic?

Yeah, Kelly, first and foremost, in Susan's prepared remarks, her statement about the sequential improvement in units, that is, and we were clear, it is grocery. So when we are referring to this sequential improvement and what we expect for the balance of the year, what is important and one of our top priorities is growing units in groceries. Now, if you look for the rest of the year, we said last quarter, and we continue to believe that each quarter this year, we will continue to sequentially improve grocery units. We're making the investment in the margin. We are focused on driving those units. And as we get toward the back half of the year, when you think about the margins, remember what Susan said. The productivity will start to provide a tailwind to the investment in order to drive the units, but we are committed to driving units through the balance of the year. Susan, do you want to add to that?

No, Sharon, I think you said it well. The primary purpose of the investments that we're making, yes, in price, yes, in loyalty, yes, in own rent, is literally all about driving that unit growth and starting those improvements. So we do expect it to continue growing. We will be funding it, again, over time. As we mentioned, the investment and the tailwinds don't exactly line up, which, again, fits the algorithm that we've shared.

But that's what gives us the confidence. Your question was what gives us confidence. That is why we are confident.

That's helpful. And is there anything that you've learned as you've had these discussions with vendors in terms of, more of a national buying process that makes you think about the opportunity, you know, over time and in any different way and sizing that up in terms of the impact that could have on productivity.

Yeah, so just what we're learning as we go through the process is there's an incredible opportunity for us, right? And as you think, we have our own manufacturing plants, so we understand that the more information that we can get, And the further out that we're out on forecasting for our own sites creates incredible efficiencies for production. It's no different for our member partners who shared with us that their ability to forecast demand, which, by the way, we're also developing, have developed, and then there's more in development, various AI tools to help us create stronger and further out demand-signing signals. But it's just a complete unlock in terms of efficiencies for everybody. It also enables us to plan further ahead and align our media and collective dollars along with our digital dollars. And, of course, the cost of goods reductions that we'll see so that we can create a comprehensive program in-store, online to drive more traffic and drive more units by creating this, again, this total package for the customers that we serve. Our vendors, I think, you know, we're a large company and, again, There are times when it's very efficient and effective for us to act locally and be very agile. But our vendors clearly recognize that there is a significant change in our thought processes that we're committed to doing this. And I'm excited about when that rings for the future.

And in the conversations, the goals that we have about driving units are completely aligned with our vendors. So when you're aligned on the same business objective, it's very helpful and very constructive in those conversations.

Yes, and to your question, we have joint business plan goals that we put in place with most of the major CPGs. So, again, we're aligned on the same targets. We're leaning in together, and I really am excited about what will come in the second half of the year.

Thank you. Our next question comes from the line of Michael Montani with Evercore ISI.

Please proceed with your question.

Yes, hi. Good morning. Thanks for taking the question. Just wanted to ask one on guidance and then one on the trends for the consumer. So on the guidance front, there was about a 40 or 50-bit increase in ID sales, but then obviously EPS did not change. So I just wanted to confirm, is that due to the nature of the ID sales being stronger in pharma, or was there incremental investments either in price or labor as you do the union contract negotiations that cause that?

Yes. So I think it's a blend of some of the things that you just described.

Yes, some of the growth within our pharmacy growth continues to be outsized. And that's great because we love that customer, we love that relationship, but there is an impact on profitability there. Sharon, is there anything that you would add from?

I think that throughout the year, we expect this. In the total comp guidance for 2025, pharmacy is going to be the biggest driver of comp for sales growth for the year. We are continuing to know what that business is doing, Mike, and we continue to believe that we are going to continue to take share from pharmacy. On the grocery side, you will see that each quarter we expect to see gradual and incremental improvement in units, and that will, through the year, bring the grocery comp as a slightly bigger percentage of the total. But on the top line, you're going to see the increase that we put in the guidance for 2025, that is pharmacy-free.

Got it. Okay. Thanks for clarifying that. And then just in terms of the consumer trends, as it relates to kind of better-for-you product, natural, organic, and otherwise, What percent of the mix is that for you today? You know, how is that trending? And I guess, is there any surprises that you're seeing with respect to GLP-1 absorption and then, you know, how that's impacting consumer buying behavior?

Sure. So, Mike, what we're seeing, and we call it NOSHE, natural organic specialty health and ethnic products. And those categories are growing for us. And it's interesting as you start to break it down, I think there's a few things at play. Certainly trends for you, sorry, certainly trends and better for you products are strong. Also interesting, though, the influence that we see from specialty items like premium sparkling water is one of our top growth categories. It's fascinating to watch. This one, oh, I had to double check the numbers, but cottage cheese is actually a strong growth category. Yes, some of that's from the focus on proteins. lower carbs, perhaps GLP-1 users, and then, just being totally frank, TikTok is driving some of that. So we're leaning into those categories. They do lend themselves, those categories pair well with some of what we see for GLP-1 customers, but it goes well beyond just the GLP user. We're definitely seeing overall trends focusing on health and well-being. And that works perfectly for us as one of our five priorities is driving the customer value proposition, and creating an environment, an ecosystem that brings customers into brick and mortar, into digital, into pharmacy and health.

Got it. Thank you. Thank you.

Thank you. Our final question this morning comes from the line of Robbie Ohms with Bank of America. Please proceed with your question.

Hi, this is Kendall Toscano. I'm for Robbie. Thanks for taking my question. I just have a follow-up in terms of the percent of your customers that are cross-shopping grocery and pharmacy today versus how much higher you think that number could go over time. And basically just trying to get a sense of after four years of pharmacy growth in the double-digit range, which has obviously been a huge sales driver but a headwind to profitability, are we nearing a point where pharmacy could eventually start to normalize or the growth rate could start to normalize? Thanks.

I can't vote. So what we're seeing is, you know, yes, of course, the cross-shopping between pharmacy and grocery is pivotal for us. We do have very strong pharmacy growth, and I mentioned a lot of that is core pharmacy business. Just a side note there as well, in that core pharmacy business, we continue to strive for profitability, stronger profitability, increasing our generic mix, improving offerings such as test and treat, immunizations, those kinds of things. And, again, creating that linkage between store and pharmacy is critical. From the pharmacy business, here's what I see. There's been a serious, and you guys see the information out there, there's been a serious decline in the availability of doors for customers to go to take care of their pharmacies. We think that's critical. And I believe that we're well-positioned. with the steps that we've made, both from an acquisition perspective, meaning acquiring scripts from outside, hiring the amazing pharmacists and techs that are out there looking for work. We need more and more of that support. So we're leveraging that and becoming, you know, I think we're becoming, that helps us become an essential choice for customers. I can get my groceries there. I can meet my pharmacy needs in an environment where the doors are shrinking, right? We have less and less opportunity in certain markets less choices for customers, and we're happy to be there for them. So I actually see it as a competitive advantage for us moving ahead with the investments that we've made in pharmacy. And I can't repeat also enough the fact that we are striving to improve the profitability there. Again, recognizing that that customer's total value when we engage them in both center store as well as pharmacy is tremendous for us. We love those customers. We want to serve them.

And, Susan, I would only add also, we have invested significantly in the customer experience in pharmacy, integrating it into the total company app, and being able to serve that customer, including, we talked last quarter, now being able to pick up your prescription at the same time that you're picking up your drive-up and go order. And as we continue to create the linkage between And the ease of shopping between the pharmacy customer and the grocery customer, we believe that that does provide incremental opportunity for us as we move forward through the year and into next year. So these investments we're making on the digital side and linking them together with everything we're doing in pharmacy and health, and then the mobile app for use in the stores, we think that that is also going to make a significant difference with these cross-shopping customers.

Thank you. Thank you.

Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Ms. Morris for any final comments.

Just thank you, everybody, for the time today. We're excited about the year to come, and thank you to our associates that make all of this happen.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.