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

Good morning, and welcome to today's investor conference call to discuss Kroger's agreement to merge with Albertsons. Please note, this event is being recorded. I would now like to turn the conference over to Rob Quast, Director of Investor Relations. Please go ahead.

Good morning, and thank you for joining us. I am joined today by Kroger's Chairman and Chief Executive Officer, Rodney McMullen; and our Chief Financial Officer, Gary Millerchip. Before we begin, I want to remind you that today's discussions will include forward-looking statements. We want to caution you that such statements are predictions, and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. The Kroger Company assumes no obligation to update that information. After our prepared remarks, we look forward to taking your questions. [Operator Instructions] During our prepared remarks this morning, we will reference a presentation that we have posted on the IR section of Kroger's website. If you are viewing the webcast, you will be able to follow along live with our presentation. Turning to today's agenda. We're thrilled to be speaking with you about our exciting combination with Albertsons. This transaction will combine 2 complementary organizations to establish a national retail footprint, expanding customer reach and improving proximity to deliver fresh, affordable food to approximately 85 million households through a premier omnichannel experience. First, we will provide an overview of why we believe this is a compelling combination for our associates, customers, communities and shareholders. Then we will walk you through the financial details, including how this combination accelerates our value creation model, before opening the call up to your questions. I will now turn the call over to Rodney.

Thank you, Rob. Good morning, everyone, and thank you for joining us today. This is an exciting day for both Kroger and Albertsons. This transaction combines 2 strong, diverse and resilient companies and allows us to make an important step in our journey to advance our strategy and achieve our purpose to feed the human spirit. By bringing our 2 companies together, we will accelerate the great work already underway at Kroger and Albertsons to better serve America. We will build upon the complementary strengths of each organization to create more opportunities for our associates, our customers and our communities. And by doing so, we are confident that this will create compelling value for our shareholders. Before I go any further, I'd like to thank several people who played a key role in assembling the strong retail company that Albertsons is today, including Bob Miller, Steve Feinberg, Vivek Sankaran and Sharon McCollam. Their and their team's efforts to combine these assets with great associates and a great customer connection makes today's announcement possible. We look forward to working closely with Vivek, Sharon and the entire Albertsons' leadership team. I also want to extend a huge thank you to the Kroger team for their hard work that has led us to this significant company milestone. Our associates are at the heart of everything we do. Their passion for delivering a fresh and convenient customer experience inspires me every day. Now let's turn to our combination with Albertsons. This is an important step in the journey to advance our strategy and achieve our purpose to feed the human spirit. We are confident our merger with Albertsons will build up on our go-to-market strategy momentum and will unlock opportunities for all of our stakeholders. Albertsons and Kroger both have a strong track record of successful integrations with mergers. To achieve success in this integration, we will focus on combining each company's strength while maintaining and enhancing both sets of distinctive banners. This transaction brings together 2 purpose-driven, value-based organizations to serve more customers around the country. Over the last several years, we have been building a single, seamless ecosystem to provide customers with a more personalized and convenient omnichannel experience, all with zero compromise. This transaction will advance these efforts by bringing Albertsons' expanded infrastructure, technology and digital and delivery service providers into our network. With a broader selection of fresh products and an expanded our brands portfolio, we will be better positioned to deliver fresher products at a great value to more customers than ever before. This is particularly important in today's environment with rising inflationary pressures and people increasingly shopping for groceries and eating at home. Our expanded portfolio, along with more personalized promotions and benefits, will help customers save on the products that matter most and help to relieve the inflationary pressures facing shoppers across the country. Together, we will continue to focus on supporting and investing in our associates as they seek to reach their full potential. As we've seen with prior mergers, we expect this transaction will open new and exciting career opportunities for our associates. As a combined company, we will build upon our similar values to create a culture that embraces diversity, equity and inclusion. Kroger's culture is rooted in our purpose to feed the human spirit. By joining forces with Albertsons, we will advance this purpose while progressing our shared mission to create a more equitable and sustainable food system. For shareholders, this transaction allows us to accelerate our progress on our go-to-market strategy focused on Fresh, Our Brands, Personalization and Seamless. Together, we will expand our food business, generating more traffic and capturing more data, which will allow us to accelerate our growth in our alternative profit businesses and generate significant cash flows to reinvest in our business and return capital to shareholders. This combination will accelerate our value creation model. In fact, during the first 4 years following close, we expect to deliver total shareholder returns well above Kroger's stand-alone model of 8% to 11% per year. We have a long track record of meaningful investments in our associates, customers and communities. These investments are an important part of our strategy. We know we win when we put our associates and customers first. We plan to continue these investments as we come together with Albertsons. The combined company will drive significant synergies that will allow us to invest approximately $0.5 billion in lowering prices for customers. We will also invest an incremental $1.3 billion in Albertsons stores to enhance the customer experience. Since 2018, Kroger has invested an incremental $1.2 billion in associate wages and benefits. As a combined company, we will remain focused on supporting and investing in our associates and expect to invest $1 billion to continue raising associate wages and comprehensive benefits post close. Our commitment to these investments reflects our vision for what Kroger and Albertsons will be: a value-based organization built around our relentless commitment to our associates, our customers, our communities and our shareholders. Next, Gary will cover the transaction details and provide an overview on the compelling benefits that this will bring for our shareholders. Gary?

Thanks, Rodney, and good morning, everyone. Before I begin, I want to echo Rodney's excitement about today's announcement. This is an important step on Kroger's journey towards achieving our long-term vision and a remarkable day in our company's history. . Let me start by covering the key terms of the merger. Kroger will acquire all outstanding shares of Albertsons for $34.10 per share in cash, subject to certain per share reductions. This leads to an implied total enterprise value of approximately $24.6 billion, including the assumption of approximately $4.7 billion of Albertsons' net debt. The purchase price at close will be reduced by approximately $6.85 per share as a result of the $4 billion special dividend that Albertsons intends to pay shareholders prior to closing. A second adjustment to the purchase price will be made for the value of any store divestitures required to close the transaction that become part of a new Albertsons' spin-off company. I'll provide additional color on this part of the transaction in a moment. On a combined basis, the 2 companies delivered approximately $210 billion in revenue, $11.6 billion of adjusted EBITDA and $3.3 billion in net earnings in fiscal year 2021. Looking ahead, we expect the transaction to be accretive to earnings in the first year following close and double-digit accretive to earnings by year 4, excluding onetime costs. We expect to achieve approximately $1 billion of annual run rate synergies, net of divestitures within the first 4 years following close of the transaction, with approximately 50% achieved within the first 2 years post close. As Rodney mentioned earlier, we expect to deliver TSR well above Kroger's stand-alone TSR model of 8% to 11% during the first 4 years post completion. And we will share more financial details, including specific TSR expectations post closure, as we get closer to the transaction date. In terms of financing, Kroger has $17.4 billion of committed bridge financing in place from Citi and Wells Fargo. At closing, we plan to fund the transaction using a combination of cash on hand and proceeds from new debt financing. We have had productive conversations with the rating agencies and are strongly committed to our current investment-grade credit rating. To prioritize deleveraging post closing, we have already paused our share repurchase program and expect to achieve our net leverage target of 2.5x EBITDA in the first 18 to 24 months post close. In connection with closing, we expect to make store divestitures in certain areas, and we will work cooperatively with the FTC to obtain clearance for the transaction. As one possible mechanism for accomplishing divestitures in certain areas, Albertsons will establish a subsidiary that would be spun-off to Albertsons' shareholders immediately prior to closing and operate as a stand-alone public company. This SpinCo would compromise a minimum of 100 stores and up to 375 stores. We will work with Albertsons to determine which stores would be part of the SpinCo and the pro forma capitalization of the new entity. As mentioned earlier, under the plans for the contemplated spin-off, the per share purchase price of $34.10 will also be reduced for these stores. The value of the stores will be calculated using a multiple of 3x 4-wall adjusted EBITDA divided by the number of fully diluted Albertsons common shares outstanding prior to close. Closing is expected to occur early in 2024, subject to required regulatory clearance and other customary closing conditions. Now I'll turn the call back over to Rodney to provide some additional color on Albertsons' business today and how the merger will accelerate our go-to-market strategy.

Thanks, Gary. Albertsons is a U.S. food retailer with more than 2,000 food and drugstores, including roughly 1,700 pharmacies, more than 400 fuel centers, 22 distribution centers and 19 manufacturing facilities across 34 states. Albertsons operates more than 20 iconic trusted banners across the country. The company is committed to being locally great and doing the little things that help to truly become part of its communities. In 2021, Albertsons achieved approximately $15 billion in revenue from its Our Brands portfolio and $25 billion in Fresh sales. In the last 2-plus years, Albertsons has expanded its delivery and pickup network and enhanced its loyal customer engagement to significantly expand their digital engagement with customers. In fact, in 2021, Albertsons drove an impressive digital sales growth of 263% on a 2-year stack basis. Most importantly, Albertsons' organization built on its purpose and values. Just this year, Albertsons announced a new ESG framework to build on its strong history of driving sustainability and supporting its communities. I have had a chance to get to know members of the Albertsons' team well leading to this transaction. What struck me most is their passion for their associates, their breadth of talent and their commitment to delivering for their customers. We believe a combination with Albertsons makes sense for Kroger at every level. This transaction is compelling because we will bring together 2 highly complementary footprints. Albertsons operates in several areas where Kroger does not have stores or has a very limited presence. By combining with Albertsons, we'll greatly expand our national footprint to serve more customers across a combined 48 states and the District of Columbia. We will also bring together 2 portfolios of iconic banners. And just as we would have done in prior transactions, we will take the learnings from each company to bring greater value and a better experience to more customers, more associates and more communities. Turning now to strategy. This combination will enhance Kroger's go-to-market strategy, which includes our priorities of Fresh, Our Brands, Personalization and Seamless. These priorities are complementary with Albertsons' priorities, and we will share how the combined -- combining the best of both organizations will accelerate our go-to-market strategy. By adding Albertsons' complementary footprint, strong technology and innovation capabilities and tremendous expertise, we will accelerate our progress in each of these focus areas. We will also bring the best of Albertsons' own omnichannel capabilities to more customers to enhance the shopping experience. As a result, the merger will accelerate our position as a more compelling alternative to larger and nonunion competitors. Together, we will drive value for our associates, customers and communities. Let's start first with our commitment to providing fresh products. We know customers care about fresh, and that means we care about fresh. By combining Kroger's Fresh for Everyone commitment with Albertsons Customer for Life strategy, we will be able to deliver a wider variety of fresh options we know our customers will love. With an expanded supplier base and a network of stores and distribution centers, we will build on this incredible progress made on our end-to-end fresh initiative. Our optimized supply chain will ensure products remain fresher longer, both in store and, more importantly, in our customers' homes. Alongside Fresh, customers are looking for unique, high-quality products. That's where Our Brands comes in. Kroger's Our Brand portfolio has been a key growth driver as customers discover Private Selection, Simple Truth, Kroger, Home Chef and Murray's Cheese alongside our expansive banner brands that offer innovative products at a great value. Additionally, Albertsons has a portfolio of 14,000 owned brands, items including O Organics, Open Nature, Lucerne and Signature products. We will be able to significantly expand Our Brands assortment to offer customers even more innovation and variety. Together, we will have a portfolio of approximately 34,000 private label products across premium, natural and organic and opening price point brands. On a combined basis in 2021, Kroger and Albertson's portfolio had sales of $43 billion. This would make us the equivalent to one of the largest CPG companies in America. Right now, Kroger manufactures nearly 30% of Our Brands products. This competitive advantage gives us oversight over the quality and supply and empowers us to create unique and innovative products. With Albertsons, we will increase our manufacturing footprint to a total of 52 plants. Together, these capabilities will allow our combined companies to drive improved quality, efficiency and value to provide unique products to our customers. Through our combined loyalty programs and data science capabilities, we will offer customers a more personalized experience, providing savings on more products that matter most to them. We will enhance our seamless shopping experience, maximizing reach, creating more meaningful promotions and deepening our relationships with customers. By adding Albertsons' For You program, we will create a combined customer base of approximately 85 million households and one of the most comprehensive first-party data repositories in food and retail space. This unmatched personalized experience will provide more relevant recommendations and promotions that save customers time and money. Now moving to Seamless. We will continue to invest in our digital capabilities, and we know that building a world-class digital ecosystem is an important part of our growth strategy. With Albertsons, we will build a premier omnichannel experience that expands our opportunity to offer our customers anything, anytime, anywhere with zero compromise. Importantly, we will have expanded -- have an expanded network of stores, distribution centers and automated fulfillment centers to provide a superior digital experience for our customers. Growing our customer -- Kroger delivery network remains a key priority as it allows us to deliver fresher products to more customers with excellent service both in new and existing geographies. Albertsons' and Kroger's combined technology, infrastructure, digital capabilities and delivery service providers will offer customers a more personalized and convenient omnichannel experience, both in-store and online [indiscernible]. Our ability to deliver these customer benefits starts with our associates. Between Kroger and Albertsons, we currently employ more than 710,000 associates. We invest in our associates because we know the associate experience drives the customer experience. When our associates thrive, they bring a best-in-class customer experience to life. Albertsons shares this commitment. What's more is we expect this transaction will allow us to continue creating a culture where associates come for a job and discover a career, unlocking new and exciting opportunities for many of our associates. We will need the incredible talent of both organizations to position our combined companies for success and execute on our winning strategy once the transaction closes. As part of this, we will secure union jobs and we'll continue to work with local unions across America to serve our communities. We are confident that with Albertsons, we will continue building a best-in-class associate experience and remain an employer of choice. As many of you know, our commitment to ESG is deeply embedded across Kroger, and we just celebrated our 5-year anniversary of our Zero Hunger | Zero Waste Social and Environmental Impact Plan. Albertsons and Kroger share a passion for sustainability, serving our communities and creating a better future for our stakeholders. The learnings and expertise Albertsons gained through their recipe for change will complement the important work we are doing with Zero Hunger | Zero Waste. Together, we will be well positioned to achieve our mission of creating a more equitable and sustainable food system. Now I'll hand it over to Gary to discuss the financial details, including how this combination accelerates our value creation model. Gary?

Thanks, Rodney. We believe this merger of 2 successful companies provides the opportunity to reshape the food retail industry and deliver significant value for our customers, associates and shareholders. As you can see on the slide, we will be creating a unique and compelling set of assets, which today includes almost 5,000 stores, over 710,000 associates, approximately 85 million households and enhanced capabilities in both Fresh and Our Brands. By combining Kroger's and Albertsons' assets, we will advance all elements of Kroger's go-to-market strategy, accelerating growth in our core supermarket business and our alternative profit businesses to deliver even more attractive returns for our shareholders. Those of you who have followed Kroger will be familiar with our value creation model. As I mentioned a moment ago, in addition to accelerating growth in our core supermarket business, the combined company will generate significantly greater data and traffic, powering incremental growth in our high-margin, alternative profit businesses. And the value we create from these fast-growing alternative profit businesses allows us to reinvest even more in the customer experience to drive additional traffic, creating a flywheel effect in our model. As shared at our Investor Day in March, Kroger's alternative profit businesses contributed over $1 billion in operating profit last year. As a combined company, we see a road map to grow alternative profits to over $1.5 billion. With approximately 85 million households, we expect our increased national reach will accelerate growth in Kroger Personal Finance, Retail Media and 84.51° customer insights. In addition, our combined data assets will fuel improved personalization and media relevance, allowing advertisers to maximize return on ad spend and increase the level of brand investment in personalized offers, such as digital coupons and rebates. Our alternative profit businesses are a key element of our value creation model today and, as a result of the merger, will be even more impactful in driving sustainable earnings growth and improving Kroger's operating margin in the future. Turning now to cost synergies we expect to achieve as a result of the merger. As I mentioned earlier, we anticipate approximately $1 billion of annual run rate synergies, net of divestitures within the first 4 years of combined operations, with approximately 50% being achieved within the first 2 years following close. By combining our complementary strategies, assets and expertise, we expect to achieve these synergies largely through improved sourcing, leveraging technology, optimization of our supply chain, manufacturing and distribution networks and general and administrative cost efficiencies. We have completed a thorough diligence review over the last several months and are confident these goals are very achievable. These synergy opportunities will also set the stage for Kroger to reinvest back in the Albertsons business through price investments and store enhancements, accelerating growth and providing additional value to our shareholders over time. Kroger has a strong value creation model that has delivered sustained, attractive total shareholder returns in recent years and has proven to be resilient throughout the economic cycle. We are excited about the opportunities presented by the merger with Albertsons to strengthen this model. By combining the best of both companies, maximizing synergies and accelerating our value creation flywheel, we expect the transaction will be accretive to earnings in the first full year following close and be double-digit accretive to earnings by year 4, excluding onetime costs. The strength of our free cash flow is an important part of Kroger's model, and we expect the transaction will be 30% accretive to total annual free cash flow by year 4. Overall, we expect the combined company to deliver total shareholder returns well above our stand-alone TSR model of 8% to 11% during the first 4 years post close. Turning now to a recap of how we plan to finance the transaction. Kroger has $17.4 billion of committed bridge financing in place from Citi and Wells Fargo. At closing, we plan to fund the transaction using a combination of cash on hand and proceeds from new debt financing. In addition, to minimize future earnings volatility, we plan to hedge the majority of the benchmark interest rate risk associated with the new debt issuance. We have had productive conversations with the rating agencies and are committed to maintaining our current investment-grade rating. In terms of capital allocation, we remain committed to investing in the business to drive profitable growth and we'll continue to prioritize high-return projects that support our strategy. We will also continue to pay our dividend quarterly and expect this to increase over time, subject to Board approval. Immediately following closing, we would expect to be above our target net debt-to-EBITDA leverage ratio of 2.3 to 2.5. We are committed to getting back within our target range within 18 to 24 months post close and have already paused our share repurchase program to prioritize deleveraging following the merger. In summary, Kroger's go-to-market strategy is resonating with our customers, and we have significant momentum in our business. We expect this momentum to continue as our business model has proven to be resilient through a variety of operating environments. Kroger's unique combination of assets, proven value creation model and strong free cash flow provide a compelling investment thesis today, an investment thesis that we believe is significantly strengthened via merger with Albertsons. Bringing together the impressive capabilities of both companies will allow us to accelerate our strategy and our value creation flywheel to deliver even more attractive returns for our investors. And now I'll turn it back to Rodney.

Thanks, Gary. I want to reiterate how excited we are to approach this major milestone in Kroger's history. The transaction builds upon both Albertsons' and Krogers' strengths. It will allow us to continue delivering for our associates, our customers and our communities while creating value for our shareholders. We will be able to offer an enhanced omnichannel experience that provides customers with anything, anytime, anywhere, all with zero compromise. We will broaden our selection of Fresh and Our Brands products, bringing high-quality products to more customers. We will do so while offering even more personalized promotions on products customers love. We will maintain our track record of investing in our associates as they seek to achieve their full potential. Our expanded network, broader customer base and enhanced capabilities will accelerate our value creation model, driving enhanced profitability and shareholder returns. As I noted earlier and as Gary noted, we have a resilient business model and are making significant progress on our strategy. This transaction will build upon the work already underway at Kroger and Albertsons, achieving our go-to-market strategy and positioning us to generate compelling value for all stakeholders. This is truly an exciting day for Kroger, for our associates, our customers and our shareholders, and we cannot wait to welcome Albertsons to the Kroger family of companies. Now with that, we'll turn to your questions.

[Operator Instructions] And our first question today comes from John Heinbockel from Guggenheim Partners.

Two questions. The first one is maybe more involved, but what do you think are the biggest buckets? You touched on some of them. The biggest buckets of revenue is synergy, right, in terms of rolling Ocado out to more locations, maybe getting Albertsons media off the ground. what are the biggest buckets? Is there any way to quantify that, right? You talked about $1 billion of cost synergy. Is there $3 billion, $5 billion of revenue synergy and/or what does it do to your comp TSR? Does the comp go up 100 basis points? So that's one big topic. And then secondly, for maybe for Gary, breakup fee, indoor reverse breakup fees. I didn't hear you mention any of that. Are there any of those?

Yes. John, on your first question, I love the question and obviously it's incredibly exciting. And the specific numbers, I don't know that we would be in a position to say what the specific number is at this point. But when you look across, it's fascinating. When you look at Our Brands as an example, both of our companies, the total numbers are pretty similar. But when you start looking within categories, each of us have categories that we do meaningfully better than the other, just for example. If you look at some of Our Brands products, there's several Our Brand products that we don't carry. If you look at our Murray's Cheese, obviously, that's something that Albertsons has a ton of great stores and incredible trade areas that we think will leverage that. If you look at the personalized offers and some of the work that each of us have done with Albertsons' For You and the Kroger and the fuel rewards, it's fascinating how many things that each of us are doing something a little bit better than the other one. So it's just a huge opportunity, and that's one of the things that we really look forward to being able to dig into and get some momentum behind it because we think there's real value there, and it's obviously a meaningful opportunity for upside that's going to take a lot of work for both of our teams. But at this point, we wouldn't have a specific number other than we think it's we would totally agree with you that it's a huge opportunity. And Gary, I'll let you talk about the breakup fee.

Yes. Thanks, Rodney. And just one thing to add, maybe, John, on the growth model. We mentioned it in your prepared comments, but Rodney said it for us, the most exciting part of the transaction is this drives our go-to-market strategy and it helps accelerate that model. So that's first and foremost why we decided this was an exciting opportunity. And specifically, on the second part of that question, on alternative profit streams, we really do believe that creating a national footprint and 85 million households allows us to take the capability we've been building over a number of years to a different level. And you've heard me share on the slide that we believe the $1 billion has a very attainable opportunity to grow to $1.5 billion very quickly because of the ability to bring our capabilities to that larger national footprint, which is more appealing, I think, across the media partners that we work with because you can now create more of those opportunities. Specifically on the reverse break fee, yes, there is. We have filed our documentation, and there was a reverse break fee of $600 million if the deal that we closed.

And was there a breakup fee? I know it's the reverse, right? Is there -- is there a straight breakup fee or no?

That's also included in the...

I guess you're right. I guess...

The next question comes from Kenneth Goldman from JPMorgan.

I'm wondering if you could maybe walk us through some of the key ways you envisioned the transaction maybe helping you better compete against some large food retailers out there. I know there's some obvious ones we can think of, but it might be helpful to hear some details about how you would emphasize the more important ways in which, I guess, better size and scale or geographic footprint could work to your advantage as you see it.

Yes. Great -- another great question, Ken. And I would really put it in 2 buckets. One would be the things that customers can see. And it's things like Fresh. By integrating the 2 supply chains, we'll be able to take days out of how long it takes for products to get from the farm to our stores, as an example. Obviously, reducing those days that it takes to get it to a store then allows the customer to have more days at home. If you look at data, it's both data are things that you can do to support the customer. So both of us have amazing algorithms on how we target and making sure that the customer experience is even more personalized for them individually. The other thing is -- one of the things on using data that's not so customer facing is how the companies use data internally to help support our associates to do their jobs easier, as an example. On technology, it's an area where, as you know, each company has significantly accelerated their investments in technology. Kroger, about 5 years ago, significantly increased the amount of investments we made on technology from a capital standpoint and from an operating expense standpoint. This allows both of us -- both of us would be investing in a new point-of-sale system as an example. By merging, obviously, it will allow us to only have one point of sale, and we'll be able to take the monies that we would have spent on developing -- each of us developing a system and investing that for further enhancement of supporting our associates and customers. So those are just some of the examples. And then really, if you get back to John's question, there's also revenue synergies as well. So it's a long list, and I know once the integration teams get started, I feel very comfortable that we'll find even more opportunities and we'll have to -- there'll be so many opportunities we'll have to prioritize them, which is very exciting.

And then just -- could I ask a quick follow-up, Rodney, if I have time. Just from a customer-facing standpoint, what will customers see? Will it be a unified loyalty card? Do you expect any banner changes to come? I know in some areas like Southern California, there's going to be -- you'll have the 4 or 5 banners in kind of the same market. I just want to get a quick sense there for you.

Yes. It's something that's important. And I would say we're early in that process and probably different markets, the approach would be different. And what I would expect is the technology behind it will end up becoming the same. But in terms of what the customer sees, we'll want to evaluate each market individually, who has the stronger market share and what's the best go-to-market strategy?

The next question comes from Rob Ohmes from Bank of America.

Actually, two follow-ups. The first one, Rodney, Albertsons has very different pricing model than Kroger. You mentioned price investment. Albertsons is, I think, a little more decentralized, more localized than you guys. Is there -- is there going to be sort of a conversion to the Kroger approach to business? And do you think there could be a disruptive period, taking more of a, I'll call it, high, low, for lack of a better word, pricing model and putting it on the EDLP model that you guys have? And then my other one for Gary would just be on the double-digit accretion assumption over 4 years. Maybe some thoughts on the assumptions on inflation or what type of environment you guys are betting on over the next 4 years to get there?

Yes. If you look at the pricing model, first of all, I wouldn't -- we wouldn't look at it in terms of moving everything to the Kroger operating model, we would really look at what connects best with the customer. Albertsons has always been investing in pricing, so it's something that's not new to them. Obviously, our experience is -- the synergies will allow us to take some of those synergies and invest it in pricing to help make the world a little bit easier for customers. And as you know, Kroger has invested in pricing for well over 10 years and it's been very helpful in terms of us improving our customer loyalty model, which then improves the household spend from a household, which creates a flywheel. And all those things together is what creates the alternative profit model. And we're going to want to make -- we will make sure that we leverage both of our learnings on alternative profits and take that to the next level, as Gary mentioned. On centralization and decentralization, we're comfortable operating both models, and we'll sit down with the teams and really learn what makes sense in each market. Even within our company today, different divisions would have a little different structure on that. The thing that is incredibly important to us is making sure that we go, and when we sit down with a CPG talk as one company, and making sure that we're leveraging our data and our ability to try to partner with CPGs to grow both of our businesses as an example. Those are things that we think are incredibly important and we'll make sure that we do. And that for us isn't so much decentralized or centralized, it's making sure that you go to market as one company so that -- the thing I always like to say, if you look at Murray's Cheese, we have a few people that are some of the best cheese experts in the world and they actually compete and win in competitions across the world. We couldn't afford to have that kind of talent in every division and being able to leverage that across a large company is always hugely beneficial from connecting with the customer and supporting the customers. So we're comfortable with the model, and we're going to sit down with each team and just talk through what makes the most sense. And with that, Gary, I'll turn it over to you. .

Yes. Just briefly, Rob, on your second question. We mentioned on the call, we won't get into a lot of detail at this point just because there's a lot of planning and time will still pass as we head towards completing the transaction. But I think what I would say is that as we've talked before, as you know, our model, we believe is resilient throughout the economic cycle, and we shared our TSR expectation and goal of 8% to 11% over time because we believe we can navigate those different operating environments to deliver on that return. So we believe our overall financial value creation model is able to deliver on that over the medium to longer term based on the commitment that we've shared. So when you think about accretion, I would think of it, if you look at the first 4 years post close, so think of it over the next 5 to 6 years, and we look at the value creation model for Kroger we believe compared to maybe a reasonable assumption around the midpoint of our TSR model. We're talking about accretion being over and above that midpoint of the TSR model over that period of time when we talk about the sort of general direction of the guidance that we shared for post merger, if that helps.

The next question comes from Simeon Gutman of Morgan Stanley.

I have a strategic question and then a SpinCo question. The strategic one is, Rodney, you've been around this business and industry for a long time. Kroger has been a product of many acquisitions. So is Albertsons. And I think there could be a fair debate that up until COVID, they haven't been that value creative, looking at the margin of the business and the return on capital. And I understand both companies think the margins are retained post COVID. But now that when you look at structural M&A, I want to ask what's different? Is industry closer to oligopoly and now that we can hold on to these synergies and continue to build? So curious what you think is different and why we hold margin and build from here?

Yes. The -- if you look, obviously, both of us, as you mentioned, have a tremendous amount of experience with mergers. And I think both of us, what we've been able to do is maintain the local relevance in communities and with customers locally while leveraging the infrastructure behind to save money. Some of those savings go to obviously supporting the customer, supporting investing. But if you look at both of our ROICs, we both earned well in excess of our cost of capital and would expect to continue to earn well in excess of our cost of capital. And we think about the overall business model is what creates value. As you know, we think the -- our TSR of 8 to 11 does a great job of good returns for our shareholders while improving the sustainability of our business model long term, while supporting our associates, job security and growth and customer connection. And this will even accelerate that. So I feel good about the opportunities for the merged companies to create some incremental benefits for our shareholders that will improve our combined ROIC. And I think that's incredibly important. And obviously continuing to earn in excess of our cost of capital is important as well.

And on SpinCo, is there -- could it turn into a sale? Is that something that could change? And then the 100 to 375 stores potential divestiture, how confident are you in that number? .