Albertsons Companies, Inc. (ACI) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for joining us today for our last company presentation of the day. It's my pleasure today to introduce Vivek Sankaran from Albertsons. Albertsons is one of the largest food and drug retailers in the U.S. It operates around 2,200 stores across 34 states and the District of Columbia under 20 well-known banners. Albertsons debuted as a public company in June and just posted very solid Q2 results in July. I'm going to turn the floor over to Vivek, who's going to start with some opening comments. Thanks for joining us.

Hello, Kate. Thanks a lot for this opportunity, and hello, everyone. Kate, before I go forward, I just want to read something my IR team said I should read. Just that it says, I would like to say that I may make statements today that include forward-looking statements that contain information that is based on our current expectations and involve risks and uncertainties that could cause actual results or events to be different from those anticipated. All right. Thanks, Kate. Thanks for giving me a couple of minutes just to give all of you an overview of the business and some of our priorities. When we've talked to you before, we've talked about the notion that the Albertsons companies is in the early stages of a transformation. And we are really excited about the progress we're making on this transformation. And the way we measure that is it first starts with the customer, and we continue to be excited about the market share gains we are seeing in our business across the footprint of our company. We continue to be excited about our customers going up the loyalty ladder, which is an important metric for us, which tells us that they're engaging even more with us. And that success with our customers is driving a lot of leverage through our P&L. And as you saw, very robust flow through, EBITDA flow-through in quarter 1. And we're doing this without a net addition of square footage. So it's also generating a lot of cash flow for us. There are a few priorities that I'd like to outline that are driving this growth. Our first priority is driving more growth from our stores, from driving more excellence in our entire fleet of stores, and there are a number of things that we are emphasizing in doing that. Number one is our assortment. Not only do we have a wide assortment, but we have a terrific fresh assortment. And we continue to invest in this fresh assortment, such as the meals programs that we are driving. And these things matter so much more in the environment today where people are eating at home. The second thing driving our in-store excellence is our Own Brands program. 12,000 items there. We continue to innovate and add items. Recognize it gives us 1,000 basis points advantage over national brands. Some of our own brands are growing faster than our stores, O Organics and Open Nature, in particular, continue to resonate. The third element in in-store excellence is just driving everyday execution. There's so much that we find and making sure we're better in-stock, getting the labor right so that people can have great service. And finally, continuing to invest in our remodels. We did 46 of them even during COVID in Q1, and we're continuing that at a significant pace. Our second priority is to supercharge our digital and e-commerce agenda. It begins with a fabulous technology backbone, making sure we have things enabled by the cloud so we can flex capacity quickly, providing a modern infrastructure behind it. Then on top of that, providing an e-commerce engine that is growing so fast for us, Drive-Up and Go, Delivery, creating all of the capabilities that grew 276% in Q1. We are excited about the growth in eCommerce and recognize that we have so much more room to grow in eCommerce as we roll out Drive-Up and Go across our stores. And the third digital agenda is our loyalty program, a significant program for us. And much like when people fly more, they care more about the airline they choose because of the accumulation of benefits in a loyalty program, and we're seeing that same phenomenon with us. People are shopping more with us going up the loyalty ladder and spending more with us. We saw 27% growth in Q1 in our loyalty program in our enrollments, which we are excited about that. Our third priority is productivity. And I've talked about a productivity agenda that is looking at all the facets of the business, from as simple as buying grocery bags better, to as sophisticated as using technology to drive -- make our promotions more effective and efficient, or automation in a store or automation in a DC. It's all of that to drive productivity with technology is an important underpinning because I personally believe first that productivity never ends. There's always room for more, and there will be room for more, but we feel really good about this $1 billion agenda that we have mentioned to you before. And our fourth priority is our culture and our talent. We have a great team with the best from inside in key positions and best from the outside to bring new thinking to us. But importantly, from a culture standpoint, we love celebrating our local knowledge that brings us speed, flexibility, yet finding ways to leverage scale. Those 4 are the primary drivers of our growth agenda and our value creation agenda. We are excited about the progress. And honestly, we believe that where the stock is today is undervalued relative to what we think it should be. So I'll pause there and I'll take questions, Kate, from you on any or all of the other topics.

Okay. That's great. And thanks for that overview. I think that's a great launching pad for us to get into the questions here. And I know people are still learning your story since you're so newly public. So that was very helpful. The big question that we continue to hear from investors, and this was a question when you went public, it's still a question today, is the sustainability of strength of the grocery comp. There's just concern that once the economy reopens and restaurants, events, concerts reopen, there's a vaccine, that you won't see similar food-at-home trends. And I don't think anybody is expecting the level that you've seen, but certainly above normal level that you've seen. Can you maybe walk us through your view on this and why you have more confidence that it will be higher than average?

Sure, Kate. Let me -- I think it's important to think about 2 metrics there, right? One is comp, the other is the baseline of the business, right? So -- and I'll explain both. And let me start actually with the baseline of the business. So if you -- we've been in this now for 6 months. Just reflect on it for a moment. For 6 months, we've all developed new rituals on our dinners, lunches, breakfast, et cetera, right? And with -- in food, rituals matter, and I suspect some of these rituals, not all of these, but some of these rituals will stick. All it matters. If you eat 1 more meal at home versus eating outside, that's 13% of shift, right, 14% of shift into the home. The second thing to think about is work from home. I think you're hearing more and more that people are going to spend a little more time working from home than they did before. These don't have to be drastic changes. These have to be 10% more time, 20% more time. And when you work from home, your breakfast and lunches come home. Both are 2 big meals that were always eaten -- more often eaten on-the-go. On-the-go was always the mantra for several years. And a lot of that is -- some of that's going to come home. The third, Kate, I tried to order Indian food in Boise the other day and went through my list and there were restaurants, it said closed, closed, closed, and there were 2 left. And 1 -- the food I ordered was disappointing, but it was just an indication to me that the capacity, the supply side on the restaurant business is starting to dry up. And I think if this thing continues for 6 more months, I think all of these 3 things will become even more entrenched. So I'm not optimistic that -- cautiously optimistic that we would have, first, a higher baseline of the business. So on that baseline business, the question is, would the comps be better pre-COVID versus post-COVID? I would argue that we should be -- we'd be disappointed if it wasn't better because when you eat more at home, fresh matters more. If you provide an exciting, fresh offering, you make it easy for the shopper and you make it safe, I think you win a little more in this marketplace. And that's the way we are thinking about the future.

That's very helpful. When it comes to market share gains, you mentioned on your Q2 call that you gained more share in markets where you're not a market share leader. Makes some sense, right? There may have been some low-hanging fruit there. But what do you think the bigger drivers were from this? And aside from the fact that you maybe have a little more ground to make up.

Yes, Kate. So there's -- I'll give you 2 varieties of that, where we are not market share leaders. One was where there were markets where our stores, if I was to just put it in the whole spectrum of our stores, these stores would have been in, let's say, the bottom 1/3 or the bottom quartile of throughput, right? And when this -- when COVID hit us, the throughput in those stores went up dramatically. And now you could say, well, it's just true, but you have to do things to drive the throughput. So those teams, I think, looked at this and said, there is a great surge in demand, what can we do to be really entrepreneurial about supply and execution. And they've sustained that supply and execution and the customer because of that for several months now, right? So it was a moment in time that gave us an opportunity to step up into a different gear in a set of markets, and now we have sustained that for 6 months. And we feel really good about having captured that customer. There are other markets where we've always had a play. We've had teams that even though we're a lower share player, have been honing things like using our loyalty program to drive traffic, using loyalty program to drive further engagement. And some of them stepped up that game. And so it was -- they were good throughput stores, but they played some of the levers we had, eCommerce, loyalty, to drive up more customer acquisition and retention. So those are 2 varieties. And I -- it's just a matter of people who are entrepreneurial and local markets taking -- making -- doing some -- making hay while the sun shines, I guess. And if you can think of it that way, even though it's a terrible situation, but they did something good out of it.

That's great. And I want to just to follow up on that comment with regards to your fresh penetration. You mentioned it in the stay at home trends and how that's an important piece of it. How much do you think -- now that you've been at Albertsons for about 18 months, how much do you believe fresh and the penetration of fresh in your stores truly differentiates Albertsons from other competitors?

Yes, Kate, when I first came in, like I should do, I took an objective look at it and to get a sense for whether that is real. And what you learn is that when you think about fresh, it's not just the fact that you carry an assortment. It's also the fact that we can customize it. So in our store, you can come in and if, let's say, you missed a certain cut of steak today from your favorite restaurant, you can get that in our store. The butcher will cut it for you. You want a custom cake made, you can get that made in our store. You want a custom arrangement of flowers, you can get that done in our store. So it is not just having the availability of fresh, but it's the commitment to providing additional, if I can call it, customization around that fresh. And that to me is what's different about it. And then in addition, there's the supply chain that you provide behind it. There is a commitment to labor in a store. It's hard to be great at fresh if you don't put the labor behind it in a store, right? You can't keep the product cold as you want to and so on and so forth. So that, to me, it's the system that works at fresh. And I think it has proven itself as a massive advantage in this environment, especially when people eat more at home. I don't know if that gets at your question, Kate.

Yes. No, that's very helpful. And the genesis, too, of a lot of our questions are ones that investors are asking. So I think that was an explanation that really helped. If we could move on to eCommerce, and this is going to be a multi-part question, one on just digital and then on fulfillment. So if we can start with just digital. You speak to anybody in retail, and they believe digital or eCommerce trends have been pulled forward anywhere between 3 and 5 years because of the pandemic. Have there been any long-term investments with regards to eCommerce that's been brought forward into this year or maybe next year that you weren't planning for a while?

Yes. Kate, first, I think your hypothesis is correct. I suspect that we will pull forward eCommerce penetration by at least a couple of years and then grow at that rate. And who knows, we'll all see. There are 2 areas that we have pulled forward. One is we were going to continue to improve the digital interface with our customers. And there's a lot of things that go into that, right, making it easier for you to make your list, getting to 1 single app. All of that, we're accelerating massively because we just -- we know that we want -- I go back to this notion of making it easy for customers. Easy, eCommerce is a big part of that easy equation. So we're pulling all of those investments forward. So think of those as technology investments. The second thing we're pulling forward is the expansion of Drive-Up and Go. It is -- Drive-Up and Go is a great business for us. It is the fastest-growing component in our eCommerce business. We have so many more stores we can expand it to. Our growth rate is much faster than the growth rate of our expansion, which tells me that there's more same-store sales in Drive-Up and Go. Think of it that way. So we're going to expand that and roll that out. And the third that we're doing, we're excited about the micro fulfillment centers, and we are starting to think about -- we're already exploring locations for this year to start rolling that out. We have a few more refinements to do before we go bigger on micro fulfillment centers. But those are the 3 areas.

Okay. And that's what my next question was, was on micro fulfillments. Because I know you have 2 stores that you've been testing it. I know you've been happy with what it's yielded so far. A lot of investors ask us what the difference is between what you're pursuing in terms of digital fulfillment versus maybe some of your competitors, particularly Kroger? I would suspect that having centers in the back of the store makes more sense with such a big fresh penetration. But I wondered if you could walk us through why micro fulfillment makes more sense for Albertsons.

So let me begin with 2. I think of these as first principles, okay? So first principle #1 is we have spent a lot of years optimizing and tailoring the assortment at a store for the neighborhood around the store. So you should not be surprised that you walk into 1 store in California and there's -- the best indicator for you is just look at the wine set. You'll see more premium set of wines, all that. That's one dimension. The other dimension is you should walk into stores and you'll find more seafood or less seafood, depending on what's happening around that store. In fact, I've walked into stores 3 miles apart where there's a lot more red onions being sold versus white onions. So we've spent the time tailoring it. And when you -- you don't want to lose that tailoring and that curation for your customer just because you're going to eCommerce, right? So that's principle #1. By the way, I told you about the cakes and the meats and we want to bring all of that customization to that. You shouldn't have to compromise when you go eCommerce with us, principle 1. Principle 2. Look, a lot of what we ship, tomatoes and onions and lettuces and cabbage, those are -- those are not value-added items. Those don't transport well unless you transport them in bulk. So we would rather optimize the last mile than send 1 piece of cabbage SKU from far away, okay? So that's the second principle, logistically from a supply chain standpoint. So that's the -- what we're trying to optimize it with. What does the MFC give us? The beauty with the MFC is I can plug it into a store in San Francisco and be 20 minutes from 1.5 million customers like that, okay? And I can -- so I can get into dense markets with an MFC and be available with not just -- and so -- but that's the physical architecture that it gives us. What does it give us from an operating standpoint? It gives us a lot more productivity, significantly higher pick rates, and it gives us a lot more accuracy in picking. So those are the 2 benefits, and I can get both those benefits with centers close to your home, 20 minutes from you, so I can now start optimizing it for delivery, pickup, sister stores and so on and so forth. So it's that combination of fresh, the combination of curation and then the ability to put these in dense markets without needing a whole bunch of real estate, getting the productivity and getting the accuracy. That's how we think of the MFCs.

Great. That's very helpful. If we could switch gears to price investment. Price investment is always a big topic when it comes to grocery. But it seems, since one of your competitors reported a couple of weeks ago, it's fueled a lot more questions. So I guess the first question is, did Albertsons invest in price during the pandemic? We know promotions were pulled back a little bit in order to mitigate some of the surge in demand. But in general, how is price investment approached in the second quarter?

Yes. Kate, we are always -- you should know that we're always looking at it by market and making price investments. We're always doing that. And that is on the base prices that we are doing, right? And it's part of the way we manage pricing. We don't like to think of it on a macro basis, it's always at a micro basis. So that's one. The second thing we do is deliver pricing through the personalization in our Just For You program. And when people go -- spend more and go up the ladder with us, it becomes even more powerful to have personalized pricing with them. So those are the 2 vehicles. And so we're always doing it. You're right that there are several categories where we are not able to promote like we could before, simply because of supply issues. But that is not just us. That is typically what you're seeing broadly in the marketplace. So to your question, yes, we did. And we've been surgical about where we invest in pricing, both from a marketplace standpoint and from an individual personalization standpoint.

Okay. That's helpful. And just to kind of close the loop on price investment and promotions. The second half of the year is going to look, we think, a lot different than the first half of the year, at least we hope it does a little bit. So how do you think about managing that with, again, the competitive environment and maybe how people are viewing holiday and things like that?

Our barometer, Kate, is always market share. I look at dollar share and unit share. And if we are gaining unit share, in particular, I'm comfortable that we're doing all the right things to manage our value proposition. So it's a combination of pricing, variety, service, et cetera. And so that's what we look at. I don't know how the rest of the year will turn out. I will tell you that I still feel the pricing environment is very rational at this point, okay? We go through -- and as we've gone through a few holidays, it continues to be quite rational. And I suspect that, that will continue given that the demand continues to strip supply at this point.

Okay. With the competitive environment, we already talked about the price investment. But I think before the pandemic began, we were expecting there was going to be some rationalization in the competitive environment, just given the number of supermarket bankruptcies and perhaps smaller players and it seems maybe they've gotten a breath of life here because they've generated some cash, which allows them to stay alive a little bit longer. So how would you characterize the competitive environment currently? And how do you expect things to shake out over the short term and also the longer term?

Kate, I have always believed that scale matters so much in this sector. And I think it will matter even more as we go forward. You're right, there has been a surge in demand for some players and it will generate a little more cash. But if you think about the things that I've mentioned so far, things like an Own Brands program, investment in a digital backbone and the infrastructure required for it, let alone just doing eCommerce, but doing it with that fundamental capability behind it, loyalty programs, et cetera, I think scale will continue to matter significantly. So my suspension is that you'll find that we probably will go through 2, 3 years, and maybe a couple of years, and you'll find that we get back to a place where some of the smaller regionals struggle. And not all of them, some of them continue to struggle in this environment.

Okay. And then my last question before I launch into our 4 questions are just on inventories. Out of stocks understandably happened, particularly in March and April, just given the surge in demand. Can you just talk about the inventory situation currently, both at Albertsons and across the industry? And are there any areas that might still be challenged?

I tell you what, we're very -- our produce is back, robust. Our meats are back. There's -- those things are behind us in the basic staples. I think you're finding that there's a shortage in those categories where demand has fundamentally stepped up such as sanitizers and paper towels and things where the supply has not caught up because it takes you a year if you were to bring up the line, right? And so those types of things we're seeing a challenge. Baking, in the baking aisle, you'll find some challenges. Process meats, you'll find challenges there. And so those are the areas that we are -- I think the industry largely is continuing to see shortage in supply. I empathize with the CPG company. It's a difficult decision for them and to what extent do they start investing in that capital to meet this demand in some categories? And will that kind of demand continue to stay? And I suspect some of them will do that because there's just a clear need.

Okay. Thank you. There are 4 questions that we're asking every company attending today and tomorrow. The first question is, if taxes were to go up next year, would you expect to pull back on your investments?

No. Our cash flow is robust, Kate. I think we are -- we will continue to invest -- our investments are primarily -- it's around -- things I've talked about. It's growth, it's productivity, it's the dividends we've committed to. And that's what -- and we feel very comfortable about continuing to do those at that pace.