Albertsons Companies, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Customer Growth and Engagement: Invested in 4 digital platforms:
  • E-commerce: Sales penetration growing, with focus on store-based e-commerce and mobile app improvements.
  • Loyalty: Simplified and enriched program driving increased engagement and spend.
  • Pharmacy and Health: Sincerely Health platform growing, driving loyalty and script/immunization growth.
  • In-store mobile feature: Launched geo-located feature to drive in-store engagement, expecting over 8 million customers to use it by end of 2024.
• Customer Value Proposition: Work with vendors to invest in price in certain categories/markets and increase Own Brands penetration to offer better value to customers.
• Technology Modernization: Invested in cloud migration, e-commerce capabilities, pharmacy digitization, pricing tools, self-checkout, supply chain systems, and retail media platform to modernize capabilities.
• Transformational Productivity: Plan to deliver $1.5 billion in savings over 3 years through scale buying, working model transformation, supply chain automation (aiming for 30% distribution volume automated by 2025), and store operations technology.

Segment Performance

• E-commerce: Sales penetration has reached over 7% of grocery revenue, with top-performing markets exceeding 9%. First-party e-commerce growth is higher than third-party. The business is under-penetrated compared to industry benchmarks but is a key growth opportunity.
• Loyalty: Launched a simplified and enriched loyalty program in April 2024, resulting in more frequent engagement, higher retention, and increased customer spend.
• Pharmacy and Health: Sales penetration stands at over 11% of total annual revenue, driven by core script growth (including GLP-1s), immunization excellence, and the Sincerely Health platform with over 1 million lives. Cross shoppers between grocery and pharmacy are highly valuable.
• Albertsons Media Collective (AMC): Built industry-leading technologies, currently growing faster than the market. Continues to invest in omni execution for brand campaigns and plans to form new partnerships to enhance the platform.

Guidance

• ID sales expected in the range of 1.8% to 2% (previously 1.8% to 2.2%).
• Adjusted EBITDA expected in the increased range of $3.95 billion to $3.99 billion (previously $3.90 billion to $3.98 billion).
• Adjusted EPS range revised to $2.25 to $2.31 per diluted share.
• Full year tax rate expected in the range of 15% to 16% due to a $81 million discrete state income tax benefit.
• Capital expenditures remain in the range of $1.8 billion to $1.9 billion.

Risks

• Consumer Caution: Price sensitivity and cautious consumer behavior could impact sales.
• Gross Margin Mix Shifts: Growth in pharmacy sales and e-commerce expansion may lead to margin pressure due to mix shifts.
• Macroeconomic Uncertainty: Uncertainty around macroeconomic factors affecting the food and beverage sector could impact results.

Q: Could you talk a little bit about the decision to maybe trim the top line or the top end rather of IDs ex fuel, what you're seeing as the fourth quarter started?

A: Vivek Sankaran said December has been 'wonky' with food and beverage sectors slowing down sequentially in December, reflecting that slowdown.

Q: Do you believe it's more of a macro?

A: Vivek Sankaran said the data shows food and beverage sectors slowing down broadly, a result of a shorter holiday window and macro factors.

Q: Of the $1.5 billion you're talking about in terms of efficiencies, do you have any kind of rough idea at this time how much of that will be reinvested versus to the bottom line?

A: Sharon McCollam said they haven't provided an outlook on that and will provide 2025 outlook in April.

Q: When you think about all the new customers, how do you size or think about wallet share?

A: Vivek Sankaran said engaging customers on digital platforms drives share of wallet, with a ramp-up curve for different platforms.

Q: When do you think food volumes will flip to positive?

A: Vivek Sankaran said typically thought of as 50 bps of food volume growth, but hard to predict when it will flip.

Q: Concern about near-term pressure and mismatch of productivity and investment?

A: Sharon McCollam said they'll provide 2025 outlook in April, looking at cadence of productivity and investments.

Q: How quickly can you ramp those initiatives, whereas they become a more meaningful contributor to the P&L?

A: Vivek Sankaran said initiatives will go at different rates, some can move quickly, others with caution, but a steady drumbeat over 3-year timeframe.

Q: Thoughts on industry slowdown in December?

A: Vivek Sankaran said shorter holiday window in December could have contributed, with consumer being cautious and price sensitive.

Q: Thoughts on gross margin for Q4?

A: Sharon McCollam said same drivers in margin, expecting growth in pharmacy sales and e-commerce, offset by productivity.

Q: Assessment of market share excluding pharmacy?

A: Vivek Sankaran said mass and club retailers growing faster, need to compete to gain market share.

Q: Growth in pharmacy from competitor closures vs own initiatives?

A: Vivek Sankaran said combination of own initiatives (app integration, Sincerely Health, better execution) and competitive closures.

Q: View on store footprint optimization?

A: Sharon McCollam said opportunities in markets with strong store openings, and will start rationalizing footprint with more closures in next couple of years.

Q: Retail media opportunity and competitive position?

A: Vivek Sankaran said retail media business growing fast from smaller base, excited about building business with strong customer presence.

Q: Color on FIFO gross margin ex pharmacy and digital?

A: Sharon McCollam said mix shift from pharmacy sales and e-commerce growth, but productivity initiatives offset some pressure.

Q: Balancing pricing, store experience, and merchandise?

A: Vivek Sankaran said customers see value in offerings, need to get sharper in some markets/categories while driving productivity.

Q: Store fleet investment and CapEx?

A: Vivek Sankaran said investing in stores based on data and analytics for growth initiatives, deploying capital effectively.

Q: ROIC and store rationalization?

A: Sharon McCollam said will provide 2025 outlook in April, talking more about ROIC and store rationalization.

Q: Free cash flow and buyback?

A: Sharon McCollam said will give 2025 outlook in April, expect to opportunistically buy back shares.

Q: Color on buying differences for productivity?

A: Vivek Sankaran said leveraging scale more with data, technology, and better decision making, not centralizing.

Q: Conversations with bidders post-deal divestiture?

A: Vivek Sankaran said focused on operating business, not having conversations with bidders currently.

Q: Food product category performance?

A: Vivek Sankaran said strong in fresh assortment, need to work on center store.

Q: Balancing 1P and 3P e-commerce growth?

A: Vivek Sankaran said 1P is bigger and faster-growing, good for digital engagement and data, 3P important for some customers.

Q: Gross margin pressure from picking and labor in 1P?

A: Sharon McCollam said expect digital business to continue growing, mix shift expected to continue.

Q: 23% tax rate ex state tax benefit?

A: Sharon McCollam said that's a good range, tax volatile but that's the expectation.

Q: Automation of distribution centers?

A: Vivek Sankaran said a few automated, continuing to roll out, with Board approval and capital allocated.

Q: Consumer changes and guidance range?

A: Sharon McCollam said fourth quarter has big events (ball games, Valentine's Day) causing variability, affecting guidance range.